SOPHiA GENETICS SA's (NASDAQ:SOPH) price-to-sales (or "P/S") ratio of 5.9x may look like a poor investment opportunity when you consider close to half the companies in the Healthcare Services industry in the United States have P/S ratios below 2.6x. 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 SOPHiA GENETICS Performed Recently?
Recent revenue growth for SOPHiA GENETICS has been in line with the industry. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Want the full picture on analyst estimates for the company? Then our free report on SOPHiA GENETICS will help you uncover what's on the horizon.
Do Revenue Forecasts Match The High P/S Ratio?
SOPHiA GENETICS' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.
If we review the last year of revenue growth, the company posted a terrific increase of 18%. The latest three year period has also seen an excellent 88% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.
Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 33% each year over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 18% each year, which is noticeably less attractive.
With this in mind, it's not hard to understand why SOPHiA GENETICS' 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.
What Does SOPHiA GENETICS' P/S Mean For Investors?
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.
We've established that SOPHiA GENETICS maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Healthcare Services industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
Before you take the next step, you should know about the 2 warning signs for SOPHiA GENETICS (1 is potentially serious!) that we have uncovered.
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.
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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.
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