EMERGE Commerce Ltd.'s (CVE:ECOM) Shares Climb 43% But Its Business Is Yet to Catch Up

EMERGE Commerce Ltd. (CVE:ECOM) shareholders would be excited to see that the share price has had a great month, posting a 43% gain and recovering from prior weakness. This latest share price bounce rounds out a remarkable 400% gain over the last twelve months.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about EMERGE Commerce's P/S ratio of 0.3x, since the median price-to-sales (or "P/S") ratio for the IT industry in Canada is also close to 0.4x. 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 EMERGE Commerce

How EMERGE Commerce Has Been Performing

Revenue has risen firmly for EMERGE Commerce recently, which is pleasing to see. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. 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.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on EMERGE Commerce's 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.

Retrospectively, the last year delivered a decent 7.8% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 8.3% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 11% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it interesting that EMERGE Commerce is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Bottom Line On EMERGE Commerce's P/S

Its shares have lifted substantially and now EMERGE Commerce's P/S is back within range of the industry median. 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 EMERGE Commerce's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Having said that, be aware EMERGE Commerce is showing 5 warning signs in our investment analysis, and 4 of those are significant.

If you're unsure about the strength of EMERGE Commerce's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.