Innodata Inc. (NASDAQ:INOD) Looks Just Right With A 36% Price Jump

Innodata Inc. (NASDAQ:INOD) shareholders have had their patience rewarded with a 36% share price jump in the last month. The last month tops off a massive increase of 139% in the last year.

After such a large jump in price, you could be forgiven for thinking Innodata is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.7x, considering almost half the companies in the United States' Professional Services industry have P/S ratios below 1.6x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Innodata

What Does Innodata's Recent Performance Look Like?

Innodata certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Innodata's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a terrific increase of 41%. The latest three year period has also seen an excellent 71% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 47% as estimated by the three analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 6.7%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Innodata's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Innodata's P/S

The strong share price surge has lead to Innodata's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Innodata's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Innodata that you should be aware 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.