Commvault Systems, Inc.'s (NASDAQ:CVLT) price-to-sales (or "P/S") ratio of 6.3x might make it look like a sell right now compared to the Software industry in the United States, where around half of the companies have P/S ratios below 4.3x and even P/S below 1.5x are quite common. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Commvault Systems' P/S Mean For Shareholders?

Commvault Systems 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 recover significantly, which has kept the P/S ratio from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

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

How Is Commvault Systems' Revenue Growth Trending?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 7.0% last year. The latest three year period has also seen a 16% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 12% each year as estimated by the eight analysts watching the company. That's shaping up to be materially lower than the 15% each year growth forecast for the broader industry.

With this information, we find it concerning that Commvault Systems is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.

What Does Commvault Systems' P/S Mean For Investors?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've concluded that Commvault Systems currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. At these price levels, investors should remain cautious, particularly if things don't improve.

It is also worth noting that we have found 2 warning signs for Commvault Systems (1 is potentially serious!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Commvault Systems, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

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