AvidXchange Holdings, Inc.'s (NASDAQ:AVDX) price-to-sales (or "P/S") ratio of 6.5x may look like a poor investment opportunity when you consider close to half the companies in the Diversified Financial industry in the United States have P/S ratios below 2.9x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Has AvidXchange Holdings Performed Recently?

With revenue growth that's superior to most other companies of late, AvidXchange Holdings has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

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

Taking a look back first, we see that the company grew revenue by an impressive 20% last year. The strong recent performance means it was also able to grow revenue by 102% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 16% per annum as estimated by the analysts watching the company. With the industry only predicted to deliver 9.8% per annum, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why AvidXchange Holdings' 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.

The Bottom Line On AvidXchange Holdings' P/S

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of AvidXchange Holdings' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware AvidXchange Holdings is showing 2 warning signs in our investment analysis, you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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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