The Price Is Right For Topicus.com Inc. (CVE:TOI)

You may think that with a price-to-sales (or "P/S") ratio of 5.4x Topicus.com Inc. (CVE:TOI) is a stock to potentially avoid, seeing as almost half of all the Software companies in Canada have P/S ratios under 3.5x and even P/S lower than 1.1x aren't out of the ordinary. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Topicus.com

What Does Topicus.com's Recent Performance Look Like?

Revenue has risen firmly for Topicus.com recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Topicus.com's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Topicus.com?

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

If we review the last year of revenue growth, the company posted a terrific increase of 23%. The latest three year period has also seen an excellent 120% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 19% shows it's noticeably more attractive.

In light of this, it's understandable that Topicus.com's P/S sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

What We Can Learn From 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.

As we suspected, our examination of Topicus.com revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Topicus.com that you need to be mindful of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.