Digimarc Corporation (NASDAQ:DMRC) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Looking at the bigger picture, even after this poor month the stock is up 55% in the last year.

In spite of the heavy fall in price, Digimarc may still be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 18.8x, when you consider almost half of the companies in the Software industry in the United States have P/S ratios under 4.3x and even P/S lower than 1.7x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Digimarc's Recent Performance Look Like?

Digimarc's revenue growth of late has been pretty similar to most other companies. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

Taking a look back first, we see that the company grew revenue by an impressive 15% last year. Pleasingly, revenue has also lifted 45% in aggregate from three years ago, thanks to the last 12 months of growth. 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 17% as estimated by the two analysts watching the company. With the industry predicted to deliver 15% growth , the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that Digimarc's P/S is higher than its industry peers. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Final Word

Digimarc's shares may have suffered, but its P/S remains high. 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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Digimarc currently trades on a higher than expected P/S. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

Before you take the next step, you should know about the 2 warning signs for Digimarc that we have uncovered.

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.