Some Confidence Is Lacking In Topicus.com Inc.'s (CVE:TOI) P/S

You may think that with a price-to-sales (or "P/S") ratio of 5.8x Topicus.com Inc. (CVE:TOI) is a stock to avoid completely, seeing as almost half of all the Software companies in Canada have P/S ratios under 3.8x and even P/S lower than 1.6x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Topicus.com

What Does Topicus.com's P/S Mean For Shareholders?

Recent times haven't been great for Topicus.com as its revenue has been rising slower than most other companies. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

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

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Topicus.com's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 15% last year. The latest three year period has also seen an excellent 84% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 14% over the next year. With the industry predicted to deliver 18% growth, the company is positioned for a weaker revenue result.

In light of this, it's alarming that Topicus.com's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Topicus.com's P/S

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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Topicus.com, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Topicus.com with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Topicus.com, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.