You may think that with a price-to-sales (or "P/S") ratio of 0.8x Xperi Inc. (NYSE:XPER) is definitely a stock worth checking out, seeing as almost half of all the Software companies in the United States have P/S ratios greater than 4.5x and even P/S above 10x 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 limited.

Check out our latest analysis for Xperi

How Has Xperi Performed Recently?

With revenue growth that's inferior to most other companies of late, Xperi has been relatively sluggish. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

How Is Xperi's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 5.7% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 38% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 6.5% as estimated by the five analysts watching the company. With the industry predicted to deliver 15% growth, the company is positioned for a weaker revenue result.

With this information, we can see why Xperi is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Xperi's 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 Xperi's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Xperi, and understanding them should be part of your investment process.

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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