You may think that with a price-to-sales (or "P/S") ratio of 8.6x Braze, Inc. (NASDAQ:BRZE) is a stock to avoid completely, seeing as almost half of all the Software companies in the United States have P/S ratios under 4.6x and even P/S lower than 1.7x aren't out of the ordinary. 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.

What Does Braze's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Braze has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Braze's Revenue Growth Trending?

In order to justify its P/S ratio, Braze would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 33% gain to the company's top line. Pleasingly, revenue has also lifted 208% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 21% during the coming year according to the analysts following the company. With the industry only predicted to deliver 14%, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Braze's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does Braze's P/S Mean For Investors?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Braze maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Software industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Braze, and understanding these should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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