When you see that almost half of the companies in the Professional Services industry in the United States have price-to-sales ratios (or "P/S") below 1.5x, Dayforce Inc. (NYSE:DAY) looks to be giving off strong sell signals with its 5.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Dayforce's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Dayforce has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Revenue Growth Forecasted For Dayforce?

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

Retrospectively, the last year delivered an exceptional 18% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 79% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 14% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 7.3% per year, which is noticeably less attractive.

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

What Does Dayforce's P/S Mean For Investors?

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.

Our look into Dayforce shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

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

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.