Unfortunately for some shareholders, the Freshworks Inc. (NASDAQ:FRSH) share price has dived 28% in the last thirty days, prolonging recent pain. Longer-term shareholders would now have taken a real hit with the stock declining 8.0% in the last year.

Even after such a large drop in price, Freshworks may still be sending sell signals at present with a price-to-sales (or "P/S") ratio of 6.4x, when you consider almost half of the companies in the Software industry in the United States have P/S ratios under 4.3x and even P/S lower than 1.6x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

How Freshworks Has Been Performing

With revenue growth that's superior to most other companies of late, Freshworks has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Freshworks' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Freshworks' is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered an exceptional 20% gain to the company's top line. The latest three year period has also seen an excellent 126% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 18% per year over the next three years. That's shaping up to be materially higher than the 15% per annum growth forecast for the broader industry.

In light of this, it's understandable that Freshworks' 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.

What Does Freshworks' P/S Mean For Investors?

There's still some elevation in Freshworks' P/S, even if the same can't be said for its share price recently. 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.

As we suspected, our examination of Freshworks' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Freshworks, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Freshworks, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.