Why Investors Shouldn't Be Surprised By Ramsay Health Care Limited's (ASX:RHC) Low P/S

You may think that with a price-to-sales (or "P/S") ratio of 0.5x Ramsay Health Care Limited (ASX:RHC) is a stock worth checking out, seeing as almost half of all the Healthcare companies in Australia have P/S ratios greater than 1.4x and even P/S higher than 4x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Our free stock report includes 3 warning signs investors should be aware of before investing in Ramsay Health Care. Read for free now.

View our latest analysis for Ramsay Health Care

What Does Ramsay Health Care's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Ramsay Health Care has been relatively sluggish. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could 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 Ramsay Health Care will help you uncover what's on the horizon.

How Is Ramsay Health Care's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Ramsay Health Care's is when the company's growth is on track to lag the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 7.4% last year. This was backed up an excellent period prior to see revenue up by 32% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 5.2% each year over the next three years. With the industry predicted to deliver 15% growth per annum, the company is positioned for a weaker revenue result.

With this information, we can see why Ramsay Health Care is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Ramsay Health Care's P/S?

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 established that Ramsay Health Care maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. The company will need a change of fortune to justify the P/S rising higher in the future.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Ramsay Health Care (1 is potentially serious!) that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.