Some Shareholders Feeling Restless Over MeridianLink, Inc.'s (NYSE:MLNK) P/S Ratio

With a median price-to-sales (or "P/S") ratio of close to 4.8x in the Software industry in the United States, you could be forgiven for feeling indifferent about MeridianLink, Inc.'s (NYSE:MLNK) P/S ratio of 5.2x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for MeridianLink

What Does MeridianLink's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, MeridianLink has been relatively sluggish. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

Is There Some Revenue Growth Forecasted For MeridianLink?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 4.3% last year. The latest three year period has also seen a 27% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 6.9% over the next year. That's shaping up to be materially lower than the 25% growth forecast for the broader industry.

With this information, we find it interesting that MeridianLink is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On MeridianLink's P/S

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

When you consider that MeridianLink's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for MeridianLink 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.