Why Investors Shouldn't Be Surprised By Pivotree Inc.'s (CVE:PVT) Low P/S

You may think that with a price-to-sales (or "P/S") ratio of 0.5x Pivotree Inc. (CVE:PVT) is a stock worth checking out, seeing as almost half of all the IT companies in Canada have P/S ratios greater than 1x and even P/S higher than 3x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Pivotree

What Does Pivotree's P/S Mean For Shareholders?

Pivotree could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Pivotree.

Is There Any Revenue Growth Forecasted For Pivotree?

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

Retrospectively, the last year delivered a frustrating 2.8% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 51% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 1.2% over the next year. That's shaping up to be materially lower than the 4.0% growth forecast for the broader industry.

With this in consideration, its clear as to why Pivotree's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Pivotree maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 1 warning sign for Pivotree that you need to take into consideration.

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.