CLPS Incorporation's (NASDAQ:CLPS) Subdued P/S Might Signal An Opportunity

With a price-to-sales (or "P/S") ratio of 0.2x CLPS Incorporation (NASDAQ:CLPS) may be sending bullish signals at the moment, given that almost half of all the IT companies in the United States have P/S ratios greater than 2x and even P/S higher than 4x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for CLPS Incorporation

What Does CLPS Incorporation's Recent Performance Look Like?

For example, consider that CLPS Incorporation's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on CLPS Incorporation will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for CLPS Incorporation, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is CLPS Incorporation's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like CLPS Incorporation's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.9%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 38% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 8.4% shows it's noticeably more attractive.

With this information, we find it odd that CLPS Incorporation is trading at a P/S lower than the industry. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On CLPS Incorporation's P/S

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of CLPS Incorporation revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for CLPS Incorporation that you should be aware of.

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.

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