UiPath Inc.'s (NYSE:PATH) price-to-sales (or "P/S") ratio of 8.5x might make it look like a strong sell right now compared to the Software industry in the United States, where around half of the companies have P/S ratios below 4.3x and even P/S below 1.6x are quite common.   Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.  

NYSE:PATH Price to Sales Ratio vs Industry May 6th 2024

What Does UiPath's Recent Performance Look Like?

Recent times have been advantageous for UiPath as its revenues have been rising faster than most other companies.   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 too much for the stock.    

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

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

UiPath's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.  

If we review the last year of revenue growth, the company posted a terrific increase of 24%.   The strong recent performance means it was also able to grow revenue by 115% in total over the last three years.  So we can start by confirming that the company has done a great job of growing revenue over that time.  

Turning to the outlook, the next three years should generate growth of 17%  per year as estimated by the analysts watching the company.  Meanwhile, the rest of the industry is forecast to only expand by 15% each year, which is noticeably less attractive.

In light of this, it's understandable that UiPath's P/S sits above the majority of other companies.  It seems most investors are expecting this strong future growth and are willing to pay more for the stock.  

The Final Word

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.

Our look into UiPath shows that its P/S ratio remains high on the merit of its strong future revenues.  Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat.  It's hard to see the share price falling strongly in the near future under these circumstances.    

We don't want to rain on the parade too much, but we did also find 1 warning sign for UiPath that you need to be mindful of.  

If you're unsure about the strength of UiPath'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.