Little Excitement Around Novatti Group Limited's (ASX:NOV) Revenues As Shares Take 30% Pounding

Novatti Group Limited (ASX:NOV) shares have retraced a considerable 30% in the last month, reversing a fair amount of their solid recent performance. For any long-term shareholders, the last month ends a year to forget by locking in a 60% share price decline.

Since its price has dipped substantially, Novatti Group may be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.5x, since almost half of all companies in the Software industry in Australia have P/S ratios greater than 2.6x and even P/S higher than 7x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

Check out our latest analysis for Novatti Group

How Has Novatti Group Performed Recently?

While the industry has experienced revenue growth lately, Novatti Group's revenue has gone into reverse gear, which is not great. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Keen to find out how analysts think Novatti Group's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Novatti Group's Revenue Growth Trending?

In order to justify its P/S ratio, Novatti Group would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered a frustrating 2.3% decrease to the company's top line. Still, the latest three year period has seen an excellent 182% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 18% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 20% per year, which is noticeably more attractive.

With this in consideration, its clear as to why Novatti Group's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Novatti Group's P/S?

Having almost fallen off a cliff, Novatti Group's share price has pulled its P/S way down as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Novatti Group's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.

You should always think about risks. Case in point, we've spotted 3 warning signs for Novatti Group you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.