With a median price-to-sales (or "P/S") ratio of close to 5.6x in the Software industry in the United States, you could be forgiven for feeling indifferent about DocuSign, Inc.'s (NASDAQ:DOCU) P/S ratio of 6.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Has DocuSign Performed Recently?

With revenue growth that's inferior to most other companies of late, DocuSign has been relatively sluggish. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

Keen to find out how analysts think DocuSign's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The P/S Ratio?

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

If we review the last year of revenue growth, the company posted a worthy increase of 7.5%. Pleasingly, revenue has also lifted 49% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 7.0% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 20% per year, which is noticeably more attractive.

With this in mind, we find it intriguing that DocuSign's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

When you consider that DocuSign's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks.

If these risks are making you reconsider your opinion on DocuSign, explore our interactive list of high quality stocks to get an idea of what else is out there.

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.