Converge Technology Solutions Corp.'s (TSE:CTS) Share Price Is Matching Sentiment Around Its Revenues

Converge Technology Solutions Corp.'s (TSE:CTS) price-to-sales (or "P/S") ratio of 0.4x might make it look like a buy right now compared to the IT industry in Canada, where around half of the companies have P/S ratios above 1x and even P/S above 3x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Converge Technology Solutions

How Converge Technology Solutions Has Been Performing

Converge Technology Solutions certainly has been doing a good job lately as it's been growing revenue more than most other companies. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Converge Technology Solutions' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 47%. The strong recent performance means it was also able to grow revenue by 208% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the eleven analysts covering the company suggest revenue should grow by 4.5% per annum over the next three years. With the industry predicted to deliver 13% growth per year, the company is positioned for a weaker revenue result.

With this information, we can see why Converge Technology Solutions 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 Does Converge Technology Solutions' P/S Mean For Investors?

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.

We've established that Converge Technology Solutions maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Converge Technology Solutions, and understanding should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.