There Is A Reason Bridgeline Digital, Inc.'s (NASDAQ:BLIN) Price Is Undemanding

Bridgeline Digital, Inc.'s (NASDAQ:BLIN) price-to-sales (or "P/S") ratio of 0.6x might make it look like a strong buy right now compared to the Software industry in the United States, where around half of the companies have P/S ratios above 4.5x and even P/S above 11x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Bridgeline Digital

What Does Bridgeline Digital's P/S Mean For Shareholders?

Bridgeline Digital hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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

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

The only time you'd be truly comfortable seeing a P/S as depressed as Bridgeline Digital's is when the company's growth is on track to lag the industry decidedly.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 2.5%. Still, the latest three year period has seen an excellent 50% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 7.0% as estimated by the three analysts watching the company. With the industry predicted to deliver 15% growth, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Bridgeline Digital's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Bridgeline Digital maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Bridgeline Digital (of which 1 is a bit unpleasant!) you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.