RingCentral, Inc.'s (NYSE:RNG) price-to-sales (or "P/S") ratio of 1.5x might make it look like a strong buy right now compared to the Software industry in the United States, where around half of the companies have P/S ratios above 4.4x and even P/S above 11x 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 so limited.

What Does RingCentral's P/S Mean For Shareholders?

RingCentral could be doing better as it's been growing revenue less than most other companies lately. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

In order to justify its P/S ratio, RingCentral would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered a decent 9.7% gain to the company's revenues. Pleasingly, revenue has also lifted 78% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 8.0% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 15% each year, which is noticeably more attractive.

In light of this, it's understandable that RingCentral's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On RingCentral's P/S

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 expected, our analysis of RingCentral's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware RingCentral is showing 1 warning sign in our investment analysis, you should know about.

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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