Shopify Inc.'s (NYSE:SHOP) price-to-sales (or "P/S") ratio of 10.2x may look like a poor investment opportunity when you consider close to half the companies in the IT industry in the United States have P/S ratios below 1.8x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

How Has Shopify Performed Recently?

Recent times have been advantageous for Shopify as its revenues have been rising faster than most other companies. 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.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shopify.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Retrospectively, the last year delivered an exceptional 26% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 115% in total over the last three years. 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 21% each year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 12% per annum growth forecast for the broader industry.

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

The Key Takeaway

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.

Our look into Shopify shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Shopify with six simple checks on some of these key factors.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.