Investors Still Aren't Entirely Convinced By Emerge Commerce Ltd.'s (CVE:ECOM) Revenues Despite 350% Price Jump

Emerge Commerce Ltd. (CVE:ECOM) shareholders would be excited to see that the share price has had a great month, posting a 350% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 47% in the last twelve months.

Even after such a large jump in price, Emerge Commerce may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.1x, considering almost half of all companies in the IT industry in Canada have P/S ratios greater than 0.9x and even P/S higher than 3x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Emerge Commerce

What Does Emerge Commerce's P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Emerge Commerce has been doing very well. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. 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 out of 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.

Do Revenue Forecasts Match The Low P/S Ratio?

Emerge Commerce's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 35% last year. This great performance means it was also able to deliver immense revenue growth over the last three years. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 10% shows it's noticeably more attractive.

With this information, we find it odd that Emerge Commerce is trading at a P/S lower than the industry. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What Does Emerge Commerce's P/S Mean For Investors?

Emerge Commerce's stock price has surged recently, but its but its P/S still remains modest. 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.

We're very surprised to see Emerge Commerce currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to perceive a likelihood of revenue fluctuations in the future.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Emerge Commerce (3 are a bit concerning) you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.