EverCommerce Inc.'s (NASDAQ:EVCM) price-to-sales (or "P/S") ratio of 3.2x might make it look like a buy right now compared to the Software industry in the United States, where around half of the companies have P/S ratios above 4.5x and even P/S above 12x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.
What Does EverCommerce's P/S Mean For Shareholders?
EverCommerce could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Keen to find out how analysts think EverCommerce's future stacks up against the industry? In that case, our free report is a great place to start.Do Revenue Forecasts Match The Low P/S Ratio?
The only time you'd be truly comfortable seeing a P/S as low as EverCommerce's is when the company's growth is on track to lag the industry.
Taking a look back first, we see that the company managed to grow revenues by a handy 7.2% last year. This was backed up an excellent period prior to see revenue up by 87% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Shifting to the future, estimates from the twelve analysts covering the company suggest revenue should grow by 2.7% over the next year. That's shaping up to be materially lower than the 14% growth forecast for the broader industry.
With this information, we can see why EverCommerce is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Bottom Line On EverCommerce's P/S
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 EverCommerce's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. The company will need a change of fortune to justify the P/S rising higher in the future.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for EverCommerce that you should be aware of.
If you're unsure about the strength of EverCommerce'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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com