Freshworks Inc. (NASDAQ:FRSH) shareholders have had their patience rewarded with a 40% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 16% over that time.

Following the firm bounce in price, Freshworks may be sending sell signals at present with a price-to-sales (or "P/S") ratio of 7.2x, when you consider almost half of the companies in the Software industry in the United States have P/S ratios under 5.5x and even P/S lower than 1.9x 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.

What Does Freshworks' Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Freshworks has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

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 103% 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.

Turning to the outlook, the next three years should generate growth of 15% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 21% per year, which is noticeably more attractive.

In light of this, it's alarming that Freshworks' P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

The large bounce in Freshworks' shares has lifted the company's P/S handsomely. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Freshworks, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Freshworks that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.