Yahoo Finance What You Can Learn From Dropsuite Limited's (ASX:DSE) P/S
When you see that almost half of the companies in the Software industry in Australia have price-to-sales ratios (or "P/S") below 2.8x, Dropsuite Limited (ASX:DSE) looks to be giving off strong sell signals with its 8.2x P/S ratio. 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.
Check out our latest analysis for Dropsuite
What Does Dropsuite's P/S Mean For Shareholders?
With revenue growth that's superior to most other companies of late, Dropsuite has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying to much for the stock.
Want the full picture on analyst estimates for the company? Then our free report on Dropsuite will help you uncover what's on the horizon.
What Are Revenue Growth Metrics Telling Us About The High P/S?
In order to justify its P/S ratio, Dropsuite would need to produce outstanding growth that's well in excess of the industry.
If we review the last year of revenue growth, the company posted a terrific increase of 77%. This great performance means it was also able to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Looking ahead now, revenue is anticipated to climb by 26% each year during the coming three years according to the dual analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 21% per annum, which is noticeably less attractive.
With this in mind, it's not hard to understand why Dropsuite's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From Dropsuite's 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.
We've established that Dropsuite maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Software industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.
Before you take the next step, you should know about the 1 warning sign for Dropsuite that we have uncovered.
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.
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