Further Upside For SomnoMed Limited (ASX:SOM) Shares Could Introduce Price Risks After 27% Bounce

Despite an already strong run, SomnoMed Limited (ASX:SOM) shares have been powering on, with a gain of 27% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 32% in the last year.

In spite of the firm bounce in price, SomnoMed's price-to-sales (or "P/S") ratio of 1.4x might still make it look like a strong buy right now compared to the wider Medical Equipment industry in Australia, where around half of the companies have P/S ratios above 3.6x and even P/S above 15x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

See our latest analysis for SomnoMed

What Does SomnoMed's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, SomnoMed has been relatively sluggish. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on SomnoMed.

Is There Any Revenue Growth Forecasted For SomnoMed?

SomnoMed's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 9.6% last year. The latest three year period has also seen an excellent 46% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 11% per annum during the coming three years according to the lone analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 12% each year, which is not materially different.

With this information, we find it odd that SomnoMed is trading at a P/S lower than the industry. It may be that most investors are not convinced the company can achieve future growth expectations.

What Does SomnoMed's P/S Mean For Investors?

SomnoMed's recent share price jump still sees fails to bring its P/S alongside the industry median. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It looks to us like the P/S figures for SomnoMed remain low despite growth that is expected to be in line with other companies in the industry. The low P/S could be an indication that the revenue growth estimates are being questioned by the market. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

And what about other risks? Every company has them, and we've spotted 4 warning signs for SomnoMed (of which 3 are potentially serious!) you should know about.

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).

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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.