Nova Eye Medical Limited (ASX:EYE) Stock Rockets 29% But Many Are Still Ignoring The Company

Nova Eye Medical Limited (ASX:EYE) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 36% over that time.

In spite of the firm bounce in price, Nova Eye Medical's price-to-sales (or "P/S") ratio of 1.8x might still make it look like a buy right now compared to the Medical Equipment industry in Australia, where around half of the companies have P/S ratios above 3.6x and even P/S above 14x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Nova Eye Medical

How Has Nova Eye Medical Performed Recently?

Recent times have been advantageous for Nova Eye Medical as its revenues have been rising faster than most other companies. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Want the full picture on analyst estimates for the company? Then our free report on Nova Eye Medical will help you uncover what's on the horizon.

How Is Nova Eye Medical's Revenue Growth Trending?

In order to justify its P/S ratio, Nova Eye Medical would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 37% last year. Pleasingly, revenue has also lifted 74% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 31% each year during the coming three years according to the dual analysts following the company. That's shaping up to be materially higher than the 12% each year growth forecast for the broader industry.

In light of this, it's peculiar that Nova Eye Medical's P/S sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Nova Eye Medical's P/S

The latest share price surge wasn't enough to lift Nova Eye Medical's P/S close to the industry median. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Nova Eye Medical's analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

Before you take the next step, you should know about the 3 warning signs for Nova Eye Medical that we have uncovered.

If these risks are making you reconsider your opinion on Nova Eye Medical, 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.