Novatti Group Limited (ASX:NOV) Surges 26% Yet Its Low P/S Is No Reason For Excitement

Those holding Novatti Group Limited (ASX:NOV) shares would be relieved that the share price has rebounded 26% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 38% over that time.

In spite of the firm bounce in price, Novatti Group may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.4x, since almost half of all companies in the Software industry in Australia have P/S ratios greater than 3x and even P/S higher than 9x are not unusual. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Novatti Group

What Does Novatti Group's Recent Performance Look Like?

Novatti Group could be doing better as it's been growing revenue less than most other companies lately. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Novatti Group will help you uncover what's on the horizon.

How Is Novatti Group's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as depressed as Novatti Group's is when the company's growth is on track to lag the industry decidedly.

Taking a look back first, we see that the company managed to grow revenues by a handy 10% last year. Pleasingly, revenue has also lifted 133% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 9.2% per annum during the coming three years according to the lone analyst following the company. That's shaping up to be materially lower than the 20% each year growth forecast for the broader industry.

With this information, we can see why Novatti Group is trading at a P/S lower than the industry. 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?

Even after such a strong price move, Novatti Group's P/S still trails the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future 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. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Novatti Group (1 makes us a bit uncomfortable!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Novatti Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.