What You Can Learn From Clearwater Analytics Holdings, Inc.'s (NYSE:CWAN) P/S

You may think that with a price-to-sales (or "P/S") ratio of 11.8x Clearwater Analytics Holdings, Inc. (NYSE:CWAN) is a stock to avoid completely, seeing as almost half of all the Software companies in the United States have P/S ratios under 4.1x and even P/S lower than 1.6x aren't out of the ordinary. 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.

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See our latest analysis for Clearwater Analytics Holdings

How Has Clearwater Analytics Holdings Performed Recently?

With revenue growth that's superior to most other companies of late, Clearwater Analytics Holdings has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think Clearwater Analytics Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For Clearwater Analytics Holdings?

The only time you'd be truly comfortable seeing a P/S as steep as Clearwater Analytics Holdings' is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 23%. Pleasingly, revenue has also lifted 79% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 19% per year during the coming three years according to the eleven analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 15% per annum, which is noticeably less attractive.

With this in mind, it's not hard to understand why Clearwater Analytics Holdings' P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Clearwater Analytics Holdings' 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 look into Clearwater Analytics Holdings shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. 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 2 warning signs for Clearwater Analytics Holdings that you should be aware of.

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.