With a price-to-sales (or "P/S") ratio of 7x Workiva Inc. (NYSE:WK) may be sending very bearish signals at the moment, given that almost half of all the Software companies in the United States have P/S ratios under 4.4x and even P/S lower than 1.7x 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 so lofty.

How Has Workiva Performed Recently?

Recent revenue growth for Workiva has been in line with the industry. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 17% gain to the company's top line. The latest three year period has also seen an excellent 77% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 14% as estimated by the ten analysts watching the company. That's shaping up to be similar to the 15% growth forecast for the broader industry.

With this in consideration, we find it intriguing that Workiva's P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Workiva's P/S

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.

Given Workiva's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Workiva is showing 4 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable.

If you're unsure about the strength of Workiva's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.