When you see that almost half of the companies in the Electronic industry in the United States have price-to-sales ratios (or "P/S") below 2x, nLIGHT, Inc. (NASDAQ:LASR) looks to be giving off some sell signals with its 3.1x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How nLIGHT Has Been Performing

With revenue that's retreating more than the industry's average of late, nLIGHT has been very sluggish. One possibility is that the P/S ratio is high because investors think the company will turn things around completely and accelerate past most others in the industry. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For nLIGHT?

There's an inherent assumption that a company should outperform the industry for P/S ratios like nLIGHT's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 14% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 17% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 10% during the coming year according to the seven analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 7.2%, which is noticeably less attractive.

With this information, we can see why nLIGHT is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On nLIGHT'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.

As we suspected, our examination of nLIGHT's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You always need to take note of risks, for example - nLIGHT has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on nLIGHT, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com