Easy Software AG's (HMSE:ESY) Prospects Need A Boost To Lift Shares
Easy Software AG's (HMSE:ESY) price-to-sales (or "P/S") ratio of 1.8x might make it look like a buy right now compared to the Software industry in Germany, where around half of the companies have P/S ratios above 2.4x and even P/S above 5x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.
See our latest analysis for Easy Software
How Has Easy Software Performed Recently?
It looks like revenue growth has deserted Easy Software recently, which is not something to boast about. Perhaps the market believes the recent lacklustre revenue performance is a sign of future underperformance relative to industry peers, hurting the P/S. If not, then existing shareholders may be feeling optimistic about the future direction of the share price.
Although there are no analyst estimates available for Easy Software, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Is There Any Revenue Growth Forecasted For Easy Software?
Easy Software'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 virtually the same number to the company's top line as the year before. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 3.4% overall from three years ago. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
In contrast to the company, the rest of the industry is expected to grow by 3.4% over the next year, which really puts the company's recent medium-term revenue decline into perspective.
In light of this, it's understandable that Easy Software's P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.
The Final Word
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.
As we suspected, our examination of Easy Software revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.
Plus, you should also learn about these 3 warning signs we've spotted with Easy Software (including 1 which makes us a bit uncomfortable).
If these risks are making you reconsider your opinion on Easy Software, 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.
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