When you see that almost half of the companies in the Healthcare industry in the United States have price-to-sales ratios (or “P/S”) below 1.2x, HealthEquity, Inc. (NASDAQ:HQY) looks to be giving off strong sell signals with its 5.8x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it’s justified.
See our latest analysis for HealthEquity
What Does HealthEquity’s P/S Mean For Shareholders?
Recent times have been advantageous for HealthEquity as its revenues have been rising faster than most other companies. 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.
Keen to find out how analysts think HealthEquity’s future stacks up against the industry? In that case, our free report is a great place to start.
Do Revenue Forecasts Match The High P/S Ratio?
There’s an inherent assumption that a company should far outperform the industry for P/S ratios like HealthEquity’s to be considered reasonable.
Taking a look back first, we see that the company grew revenue by an impressive 17% last year. Pleasingly, revenue has also lifted 30% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it’s fair to say the revenue growth recently has been superb for the company.
Turning to the outlook, the next year should generate growth of 14% as estimated by the twelve analysts watching the company. With the industry only predicted to deliver 7.7%, the company is positioned for a stronger revenue result.
In light of this, it’s understandable that HealthEquity’s 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 Final Word
It’s argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We’ve established that HealthEquity maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Healthcare 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.
We don’t want to rain on the parade too much, but we did also find 1 warning sign for HealthEquity that you need to be mindful of.
If strong companies turning a profit tickle your fancy, then you’ll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
Valuation is complex, but we’re helping make it simple.
Find out whether HealthEquity is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
