SomnoMed Limited's (ASX:SOM) Share Price Boosted 30% But Its Business Prospects Need A Lift Too

SomnoMed Limited (ASX:SOM) shares have continued their recent momentum with a 30% gain in the last month alone. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 67% share price drop in the last twelve months.

In spite of the firm bounce in price, SomnoMed's price-to-sales (or "P/S") ratio of 0.8x 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 4.8x and even P/S above 12x are quite common. 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?

SomnoMed could be doing better as it's been growing revenue less than most other companies lately. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. 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 SomnoMed will help you uncover what's on the horizon.

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like SomnoMed's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 13% last year. The latest three year period has also seen an excellent 62% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 1.5% over the next year. With the industry predicted to deliver 14% growth, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why SomnoMed's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

SomnoMed's recent share price jump still sees fails to bring its P/S alongside the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As expected, our analysis of SomnoMed's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for SomnoMed (2 make us uncomfortable) you should be aware of.

If you're unsure about the strength of SomnoMed's 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com