Alliança Saúde e Participações S.A. (BVMF:AALR3) Stock Rockets 36% As Investors Are Less Pessimistic Than Expected

Alliança Saúde e Participações S.A. (BVMF:AALR3) shares have continued their recent momentum with a 36% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 56%.

Since its price has surged higher, given close to half the companies operating in Brazil's Healthcare industry have price-to-sales ratios (or "P/S") below 0.7x, you may consider Alliança Saúde e Participações as a stock to potentially avoid with its 1.5x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Alliança Saúde e Participações

What Does Alliança Saúde e Participações' P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Alliança Saúde e Participações, which is generally not a bad outcome. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Alliança Saúde e Participações will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Alliança Saúde e Participações' is when the company's growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 5.0%. The solid recent performance means it was also able to grow revenue by 6.1% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 11% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that Alliança Saúde e Participações' P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Alliança Saúde e Participações' P/S

Alliança Saúde e Participações' P/S is on the rise since its shares have risen strongly. 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.

Our examination of Alliança Saúde e Participações revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Alliança Saúde e Participações that you should be aware of.

If these risks are making you reconsider your opinion on Alliança Saúde e Participações, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.