Ooma, Inc.'s (NYSE:OOMA) price-to-sales (or "P/S") ratio of 1.2x might make it look like a strong buy right now compared to the Software industry in the United States, where around half of the companies have P/S ratios above 4.6x and even P/S above 11x 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 limited.

What Does Ooma's Recent Performance Look Like?

Recent times haven't been great for Ooma as its revenue has been rising slower than most other companies. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

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

Taking a look back first, we see that the company managed to grow revenues by a handy 8.7% last year. The latest three year period has also seen an excellent 38% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 7.9% each year during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 19% per year, which is noticeably more attractive.

In light of this, it's understandable that Ooma's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

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.

We've established that Ooma maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Ooma you should know about.

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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