Yahoo Finance Getting In Cheap On Volpara Health Technologies Limited (ASX:VHT) Is Unlikely
Volpara Health Technologies Limited's (ASX:VHT) price-to-sales (or "P/S") ratio of 6.9x might make it look like a strong sell right now compared to the Healthcare Services industry in Australia, where around half of the companies have P/S ratios below 4.2x and even P/S below 2x 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.
View our latest analysis for Volpara Health Technologies
How Volpara Health Technologies Has Been Performing
With revenue growth that's inferior to most other companies of late, Volpara Health Technologies has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying to much for the stock.
Keen to find out how analysts think Volpara Health Technologies' future stacks up against the industry? In that case, our free report is a great place to start.
What Are Revenue Growth Metrics Telling Us About The High P/S?
There's an inherent assumption that a company should far outperform the industry for P/S ratios like Volpara Health Technologies' to be considered reasonable.
Taking a look back first, we see that the company grew revenue by an impressive 36% last year. The latest three year period has also seen an excellent 222% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.
Looking ahead now, revenue is anticipated to climb by 21% during the coming year according to the two analysts following the company. That's shaping up to be materially lower than the 44% growth forecast for the broader industry.
With this in consideration, we believe it doesn't make sense that Volpara Health Technologies' P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.
The Final Word
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.
It comes as a surprise to see Volpara Health Technologies trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
Before you settle on your opinion, we've discovered 1 warning sign for Volpara Health Technologies that you should be aware of.
If you're unsure about the strength of Volpara Health Technologies' 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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
