Pinning Down Coveo Solutions Inc.'s (TSE:CVO) P/S Is Difficult Right Now

With a median price-to-sales (or "P/S") ratio of close to 3.4x in the Software industry in Canada, you could be forgiven for feeling indifferent about Coveo Solutions Inc.'s (TSE:CVO) P/S ratio of 4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Coveo Solutions

What Does Coveo Solutions' P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Coveo Solutions has been relatively sluggish. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

Is There Some Revenue Growth Forecasted For Coveo Solutions?

The only time you'd be comfortable seeing a P/S like Coveo Solutions' is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company managed to grow revenues by a handy 7.2% last year. Pleasingly, revenue has also lifted 68% 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 11% during the coming year according to the eight analysts following the company. That's shaping up to be materially lower than the 18% growth forecast for the broader industry.

With this in mind, we find it intriguing that Coveo Solutions' P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look at the analysts forecasts of Coveo Solutions' revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

Plus, you should also learn about these 2 warning signs we've spotted with Coveo Solutions (including 1 which makes us a bit uncomfortable).

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.