Harmonic Inc.'s (NASDAQ:HLIT) Earnings Haven't Escaped The Attention Of Investors

Harmonic Inc.'s (NASDAQ:HLIT) price-to-sales (or "P/S") ratio of 2.3x may not look like an appealing investment opportunity when you consider close to half the companies in the Communications industry in the United States have P/S ratios below 1x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Harmonic

What Does Harmonic's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Harmonic's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Harmonic.

What Are Revenue Growth Metrics Telling Us About The High P/S?

Harmonic's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than 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 1.8%. Still, the latest three year period has seen an excellent 64% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to climb by 16% during the coming year according to the five analysts following the company. That's shaping up to be materially higher than the 0.3% growth forecast for the broader industry.

In light of this, it's understandable that Harmonic's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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

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.

We've established that Harmonic maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Communications industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Harmonic that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.