GSE Systems, Inc. (NASDAQ:GVP) shareholders would be excited to see that the share price has had a great month, posting a 92% gain and recovering from prior weakness.    Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 43% over that time.  

In spite of the firm bounce in price, GSE Systems may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.2x, since almost half of all companies in the Software industry in the United States have P/S ratios greater than 4.5x and even P/S higher than 10x are not unusual.   Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.  

See our latest analysis for GSE Systems

NasdaqCM:GVP Price to Sales Ratio vs Industry November 16th 2023

What Does GSE Systems' Recent Performance Look Like?

GSE Systems could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth.   It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio.  If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.    

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

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

In order to justify its P/S ratio, GSE Systems would need to produce anemic growth that's substantially trailing the industry.  

Retrospectively, the last year delivered a frustrating 14% decrease to the company's top line.   This means it has also seen a slide in revenue over the longer-term as revenue is down 34% in total over the last three years.  Therefore, it's fair to say the revenue growth recently has been undesirable for the company.  

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 19% each year over the next three years.  Meanwhile, the rest of the industry is forecast to only expand by 16% per annum, which is noticeably less attractive.

With this in consideration, we find it intriguing that GSE Systems' P/S sits behind most of its industry peers.  It looks like most investors are not convinced at all that the company can achieve future growth expectations.  

What We Can Learn From GSE Systems' P/S?

GSE Systems' recent share price jump still sees fails to bring its P/S alongside the industry median.      Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

GSE Systems' analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted.  When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio.  At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.    

We don't want to rain on the parade too much, but we did also find 5 warning signs for GSE Systems (2 can't be ignored!) that you need to be mindful of.  

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.