Establishment Labs Holdings Inc.'s (NASDAQ:ESTA) price-to-sales (or "P/S") ratio of 10.7x might make it look like a strong sell right now compared to the Medical Equipment industry in the United States, where around half of the companies have P/S ratios below 3.6x and even P/S below 1.5x 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 lofty.
How Establishment Labs Holdings Has Been Performing
Establishment Labs Holdings certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
Keen to find out how analysts think Establishment Labs Holdings' future stacks up against the industry? In that case, our free report is a great place to start.
How Is Establishment Labs Holdings' Revenue Growth Trending?
There's an inherent assumption that a company should far outperform the industry for P/S ratios like Establishment Labs Holdings' to be considered reasonable.
Retrospectively, the last year delivered an exceptional 28% gain to the company's top line. Pleasingly, revenue has also lifted 81% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.
Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 33% per year over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 10.0% per year, which is noticeably less attractive.
With this information, we can see why Establishment Labs Holdings is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Establishment Labs Holdings' P/S
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 Establishment Labs Holdings maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Medical Equipment industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. 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 5 warning signs for Establishment Labs Holdings (1 is a bit concerning!) that we have uncovered.
If these risks are making you reconsider your opinion on Establishment Labs Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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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