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With a price-to-sales (or "P/S") ratio of 1.7x TomTom N.V. (AMS:TOM2) may be sending bullish signals at the moment, given that almost half of all the Software companies in the Netherlands have P/S ratios greater than 2.4x and even P/S higher than 5x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.
Check out our latest analysis for TomTom
How Has TomTom Performed Recently?
TomTom could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.
Want the full picture on analyst estimates for the company? Then our free report on TomTom will help you uncover what's on the horizon.
What Are Revenue Growth Metrics Telling Us About The Low P/S?
TomTom's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.
Retrospectively, the last year delivered a decent 8.8% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 17% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.
Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 7.3% per year over the next three years. That's shaping up to be similar to the 8.5% per year growth forecast for the broader industry.
In light of this, it's peculiar that TomTom's P/S sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.
The Bottom Line On TomTom's P/S
It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've seen that TomTom currently trades on a lower than expected P/S since its forecast growth is in line with the wider industry. The low P/S could be an indication that the revenue growth estimates are being questioned by the market. Perhaps investors are concerned that the company could underperform against the forecasts over the near term.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for TomTom that you should be aware of.