With a median price-to-sales (or "P/S") ratio of close to 4.5x in the Software industry in the United States, you could be forgiven for feeling indifferent about PagerDuty, Inc.'s (NYSE:PD) P/S ratio of 3.9x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

What Does PagerDuty's P/S Mean For Shareholders?

PagerDuty could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. If not, then existing shareholders may be a little nervous about the viability of the share price.

How Is PagerDuty's Revenue Growth Trending?

In order to justify its P/S ratio, PagerDuty would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a decent 10% gain to the company's revenues. Pleasingly, revenue has also lifted 83% in aggregate from three years ago, partly thanks to the last 12 months of growth. 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 9.8% during the coming year according to the twelve analysts following the company. With the industry predicted to deliver 24% growth, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that PagerDuty's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Given that PagerDuty's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

And what about other risks? Every company has them, and we've spotted 1 warning sign for PagerDuty you should know about.

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