EMERGE Commerce Ltd. (CVE:ECOM) Stocks Pounded By 31% But Not Lagging Industry On Growth Or Pricing

EMERGE Commerce Ltd. (CVE:ECOM) shareholders won't be pleased to see that the share price has had a very rough month, dropping 31% and undoing the prior period's positive performance. Looking at the bigger picture, even after this poor month the stock is up 50% in the last year.

Although its price has dipped substantially, it's still not a stretch to say that EMERGE Commerce's price-to-sales (or "P/S") ratio of 0.3x right now seems quite "middle-of-the-road" compared to the IT industry in Canada, where the median P/S ratio is around 0.7x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for EMERGE Commerce

How Has EMERGE Commerce Performed Recently?

For example, consider that EMERGE Commerce's financial performance has been pretty ordinary lately as revenue growth is non-existent. One possibility is that the P/S is moderate because investors think this benign revenue growth rate might not be enough to outperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Although there are no analyst estimates available for EMERGE Commerce, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The P/S?

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

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Still, the latest three year period was better as it's delivered a decent 30% overall rise in revenue. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

It's interesting to note that the rest of the industry is similarly expected to grow by 9.2% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we can see why EMERGE Commerce is trading at a fairly similar P/S to the industry. Apparently shareholders are comfortable to simply hold on assuming the company will continue keeping a low profile.

The Bottom Line On EMERGE Commerce's P/S

With its share price dropping off a cliff, the P/S for EMERGE Commerce looks to be in line with the rest of the IT industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

It appears to us that EMERGE Commerce maintains its moderate P/S off the back of its recent three-year growth being in line with the wider industry forecast. With previous revenue trends that keep up with the current industry outlook, it's hard to justify the company's P/S ratio deviating much from it's current point. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 5 warning signs for EMERGE Commerce you should be aware of, and 3 of them are a bit unpleasant.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.