There's No Escaping RingCentral, Inc.'s (NYSE:RNG) Muted Revenues

RingCentral, Inc.'s (NYSE:RNG) price-to-sales (or "P/S") ratio of 1x 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 5.5x and even P/S above 12x 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.

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See our latest analysis for RingCentral

How Has RingCentral Performed Recently?

RingCentral could be doing better as it's been growing revenue less than most other companies lately. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

How Is RingCentral's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a worthy increase of 7.8%. This was backed up an excellent period prior to see revenue up by 42% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 4.9% per year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 17% each year, which is noticeably more attractive.

With this in consideration, its clear as to why RingCentral's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What Does RingCentral's P/S Mean For Investors?

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.

As we suspected, our examination of RingCentral's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. 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.

Having said that, be aware RingCentral is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of RingCentral's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.