When you see that almost half of the companies in the Capital Markets industry in the United States have price-to-sales ratios (or "P/S") below 3.4x, Open Lending Corporation (NASDAQ:LPRO) looks to be giving off strong sell signals with its 6.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Open Lending

How Has Open Lending Performed Recently?

While the industry has experienced revenue growth lately, Open Lending's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Open Lending will help you uncover what's on the horizon.

How Is Open Lending's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Open Lending's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 26% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 53% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 21% as estimated by the nine analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 11%, which is noticeably less attractive.

In light of this, it's understandable that Open Lending's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look into Open Lending shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 1 warning sign for Open Lending that we have uncovered.

If you're unsure about the strength of Open Lending's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.