With a median price-to-sales (or "P/S") ratio of close to 4.3x in the Software industry in the United States, you could be forgiven for feeling indifferent about Tuya Inc.'s (NYSE:TUYA) P/S ratio of 4.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Has Tuya Performed Recently?

Tuya could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Tuya will help you uncover what's on the horizon.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Tuya 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. The latest three year period has also seen a 28% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good 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 five analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 15% per year, which is not materially different.

With this in mind, it makes sense that Tuya's P/S is closely matching its industry peers. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Key Takeaway

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.

We've seen that Tuya maintains an adequate P/S seeing as its revenue growth figures match the rest of the industry. At this stage investors feel the potential for an improvement or deterioration in revenue isn't great enough to push P/S in a higher or lower direction. If all things remain constant, the possibility of a drastic share price movement remains fairly remote.

Plus, you should also learn about this 1 warning sign we've spotted with Tuya.

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.