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Nephros, Inc.'s (NASDAQ:NEPH) P/S Is Still On The Mark Following 40% Share Price Bounce

Nephros, Inc. (NASDAQ:NEPH) shares have continued their recent momentum with a 40% gain in the last month alone. The annual gain comes to 157% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given close to half the companies operating in the United States' Consumer Durables industry have price-to-sales ratios (or "P/S") below 0.7x, you may consider Nephros as a stock to potentially avoid with its 2.2x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Nephros

ps-multiple-vs-industry
ps-multiple-vs-industry

How Nephros Has Been Performing

With revenue growth that's superior to most other companies of late, Nephros has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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What Are Revenue Growth Metrics Telling Us About The High P/S?

Nephros' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 34% last year. The latest three year period has also seen an excellent 44% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 22% as estimated by the two analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 0.9%, which is noticeably less attractive.

In light of this, it's understandable that Nephros' P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Nephros' P/S

The large bounce in Nephros' shares has lifted the company's P/S handsomely. 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.

As we suspected, our examination of Nephros' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Nephros that you need to be mindful of.

If these risks are making you reconsider your opinion on Nephros, explore our interactive list of high quality stocks to get an idea of what else is out there.

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.