Market Still Lacking Some Conviction On SomnoMed Limited (ASX:SOM)

With a price-to-sales (or "P/S") ratio of 0.6x SomnoMed Limited (ASX:SOM) may be sending very bullish signals at the moment, given that almost half of all the Medical Equipment companies in Australia have P/S ratios greater than 4.3x and even P/S higher than 14x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

Check out our latest analysis for SomnoMed

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

There hasn't been much to differentiate SomnoMed's and the industry's revenue growth lately. One possibility is that the P/S ratio is low because investors think this modest revenue performance may begin to slide. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

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

How Is SomnoMed's Revenue Growth Trending?

In order to justify its P/S ratio, SomnoMed would need to produce anemic growth that's substantially trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 15% last year. The latest three year period has also seen an excellent 46% overall rise in revenue, aided by its short-term performance. 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 12% each year during the coming three years according to the two analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 11% per year, which is not materially different.

In light of this, it's peculiar that SomnoMed's P/S sits below the majority of other companies. 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?

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of SomnoMed's revealed that its P/S remains low despite analyst forecasts of revenue growth matching the wider industry. Despite average revenue growth estimates, there could be some unobserved threats keeping the P/S low. Perhaps investors are concerned that the company could underperform against the forecasts over the near term.

Having said that, be aware SomnoMed is showing 4 warning signs in our investment analysis, and 1 of those can't be ignored.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.