Innodata Inc.'s (NASDAQ:INOD) P/S Is Still On The Mark Following 31% Share Price Bounce

Innodata Inc. (NASDAQ:INOD) shares have had a really impressive month, gaining 31% after a shaky period beforehand. The annual gain comes to 258% following the latest surge, making investors sit up and take notice.

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 9.3x, considering almost half the companies in the United States' Professional Services industry have P/S ratios below 1.3x. 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.

Check out our latest analysis for Innodata

What Does Innodata's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Innodata has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

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

Innodata's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 72%. The strong recent performance means it was also able to grow revenue by 109% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 50% over the next year. That's shaping up to be materially higher than the 6.7% growth forecast for the broader industry.

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

Innodata's P/S has grown nicely over the last month thanks to a handy boost in the share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Innodata maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Professional Services industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You should always think about risks. Case in point, we've spotted 3 warning signs for Innodata you should be aware of, and 1 of them can't be ignored.

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.