CS Disco, Inc.'s (NYSE:LAW) price-to-sales (or "P/S") ratio of 1.7x 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 5.5x and even P/S above 12x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

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See our latest analysis for CS Disco

How Has CS Disco Performed Recently?

With revenue growth that's inferior to most other companies of late, CS Disco 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 this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on CS Disco.

How Is CS Disco's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a worthy increase of 3.8%. The latest three year period has also seen a 14% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 6.0% as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 16% growth forecast for the broader industry.

In light of this, it's understandable that CS Disco's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From CS Disco's P/S?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of CS Disco'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.

Plus, you should also learn about these 2 warning signs we've spotted with CS Disco.

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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