Elastic N.V.'s (NYSE:ESTC) price-to-sales (or "P/S") ratio of 6.9x 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 5.1x and even P/S below 1.8x 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 Elastic's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Elastic has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Elastic's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Elastic's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 19% last year. Pleasingly, revenue has also lifted 96% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 15% per year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 20% per year, which is noticeably more attractive.

In light of this, it's alarming that Elastic's P/S sits above the majority of other companies. 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. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Elastic's 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.

It comes as a surprise to see Elastic trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Elastic (at least 1 which is potentially serious), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Elastic, 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.