Nova Eye Medical Limited (ASX:EYE) Soars 29% But It's A Story Of Risk Vs Reward

Nova Eye Medical Limited (ASX:EYE) shareholders are no doubt pleased to see that the share price has bounced 29% in the last month, although it is still struggling to make up recently lost ground. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, Nova Eye Medical may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 3.2x, since almost half of all companies in the Medical Equipment industry in Australia have P/S ratios greater than 5.2x and even P/S higher than 11x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Nova Eye Medical

What Does Nova Eye Medical's Recent Performance Look Like?

Nova Eye Medical's revenue growth of late has been pretty similar to most other companies. It might be that many expect the mediocre revenue performance to degrade, which has repressed the P/S ratio. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.

Keen to find out how analysts think Nova Eye Medical's 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 Low P/S?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Nova Eye Medical's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 23%. Pleasingly, revenue has also lifted 54% 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.

Looking ahead now, revenue is anticipated to climb by 41% during the coming year according to the dual analysts following the company. With the industry only predicted to deliver 14%, the company is positioned for a stronger revenue result.

With this information, we find it odd that Nova Eye Medical is trading at a P/S lower than the industry. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

The latest share price surge wasn't enough to lift Nova Eye Medical's P/S close to the industry median. 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.

To us, it seems Nova Eye Medical currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. The reason for this depressed P/S could potentially be found in the risks the market is pricing in. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

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

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.