Lumos Diagnostics Holdings Limited's (ASX:LDX) 71% Share Price Surge Not Quite Adding Up

Despite an already strong run, Lumos Diagnostics Holdings Limited (ASX:LDX) shares have been powering on, with a gain of 71% in the last thirty days. The last month tops off a massive increase of 178% in the last year.

After such a large jump in price, Lumos Diagnostics Holdings may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 5x, since almost half of all companies in the Medical Equipment in Australia have P/S ratios under 3.9x and even P/S lower than 1.6x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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View our latest analysis for Lumos Diagnostics Holdings

How Lumos Diagnostics Holdings Has Been Performing

There hasn't been much to differentiate Lumos Diagnostics Holdings' and the industry's revenue growth lately. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. If not, then existing shareholders may be a little nervous about the viability of the share price.

Keen to find out how analysts think Lumos Diagnostics Holdings' 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 outperform the industry for P/S ratios like Lumos Diagnostics Holdings' to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 11%. Revenue has also lifted 6.6% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 69% over the next year. Meanwhile, the rest of the industry is forecast to expand by 111%, which is noticeably more attractive.

In light of this, it's alarming that Lumos Diagnostics Holdings' P/S sits above the majority of other companies. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Lumos Diagnostics Holdings' P/S

Lumos Diagnostics Holdings shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

We've concluded that Lumos Diagnostics Holdings currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 4 warning signs we've spotted with Lumos Diagnostics Holdings (including 2 which are a bit unpleasant).

If you're unsure about the strength of Lumos Diagnostics Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.