When you see that almost half of the companies in the Software industry in the United Kingdom have price-to-sales ratios (or "P/S") below 2.6x, IQGeo Group plc (LON:IQG) looks to be giving off strong sell signals with its 5.9x 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.
View our latest analysis for IQGeo Group
How IQGeo Group Has Been Performing
With revenue growth that's superior to most other companies of late, IQGeo Group has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.
Want the full picture on analyst estimates for the company? Then our free report on IQGeo Group will help you uncover what's on the horizon.
Is There Enough Revenue Growth Forecasted For IQGeo Group?
The only time you'd be truly comfortable seeing a P/S as steep as IQGeo Group's is when the company's growth is on track to outshine the industry decidedly.
Taking a look back first, we see that the company grew revenue by an impressive 92% last year. The strong recent performance means it was also able to grow revenue by 241% 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.
Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 17% over the next year. With the industry only predicted to deliver 11%, the company is positioned for a stronger revenue result.
With this information, we can see why IQGeo Group is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
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.
As we suspected, our examination of IQGeo Group's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.
And what about other risks? Every company has them, and we've spotted 1 warning sign for IQGeo Group you should know about.