Envestnet, Inc. (NYSE:ENV) Stock Catapults 34% Though Its Price And Business Still Lag The Industry

Envestnet, Inc. (NYSE:ENV) shareholders would be excited to see that the share price has had a great month, posting a 34% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 16% in the last twelve months.

Even after such a large jump in price, Envestnet's price-to-sales (or "P/S") ratio of 2.2x might still make it look like a 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. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Envestnet

What Does Envestnet's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Envestnet's revenue has gone into reverse gear, which is not great. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

How Is Envestnet's Revenue Growth Trending?

In order to justify its P/S ratio, Envestnet would need to produce sluggish growth that's trailing the industry.

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 3.6%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 25% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 7.6% per year as estimated by the nine analysts watching the company. That's shaping up to be materially lower than the 17% per annum growth forecast for the broader industry.

With this information, we can see why Envestnet is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Despite Envestnet's share price climbing recently, its P/S still lags most other companies. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Envestnet maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Envestnet with six simple checks on some of these key factors.

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.