Credo Technology Group Holding Ltd's (NASDAQ:CRDO) price-to-sales (or "P/S") ratio of 24.6x might make it look like a strong sell right now compared to the Semiconductor industry in the United States, where around half of the companies have P/S ratios below 4x and even P/S below 1.6x are quite common. 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.

How Has Credo Technology Group Holding Performed Recently?

With revenue growth that's inferior to most other companies of late, Credo Technology Group Holding has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Credo Technology Group Holding's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 4.7% gain to the company's revenues. Pleasingly, revenue has also lifted 229% in aggregate from three years ago, partly 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 three years should generate growth of 49% per annum as estimated by the eleven analysts watching the company. With the industry only predicted to deliver 28% per annum, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Credo Technology Group Holding's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Credo Technology Group Holding'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 Credo Technology Group Holding's 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Credo Technology Group Holding you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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