i3 Verticals, Inc. (NASDAQ:IIIV) Could Be Riskier Than It Looks

You may think that with a price-to-sales (or "P/S") ratio of 1.3x i3 Verticals, Inc. (NASDAQ:IIIV) is a stock worth checking out, seeing as almost half of all the Diversified Financial companies in the United States have P/S ratios greater than 2.6x and even P/S higher than 5x 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 i3 Verticals

How i3 Verticals Has Been Performing

With revenue growth that's inferior to most other companies of late, i3 Verticals has been relatively sluggish. The P/S ratio is probably low because investors think this lacklustre 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 i3 Verticals.

Is There Any Revenue Growth Forecasted For i3 Verticals?

The only time you'd be truly comfortable seeing a P/S as low as i3 Verticals' is when the company's growth is on track to lag the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 14% last year. This was backed up an excellent period prior to see revenue up by 145% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 6.9% during the coming year according to the seven analysts following the company. That's shaping up to be materially higher than the 1.3% growth forecast for the broader industry.

In light of this, it's peculiar that i3 Verticals' P/S sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

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.

i3 Verticals' analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. The reason for this depressed P/S could potentially be found in the risks the market is pricing in. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with i3 Verticals (at least 1 which shouldn't be ignored), and understanding them should be part of your investment process.

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.