What Alliança Saúde e Participações S.A.'s (BVMF:AALR3) 26% Share Price Gain Is Not Telling You

Alliança Saúde e Participações S.A. (BVMF:AALR3) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 61% share price drop in the last twelve months.

In spite of the firm bounce in price, it's still not a stretch to say that Alliança Saúde e Participações' price-to-sales (or "P/S") ratio of 0.9x right now seems quite "middle-of-the-road" compared to the Healthcare industry in Brazil, where the median P/S ratio is around 0.8x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Alliança Saúde e Participações

How Alliança Saúde e Participações Has Been Performing

The revenue growth achieved at Alliança Saúde e Participações over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Although there are no analyst estimates available for Alliança Saúde e Participações, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Alliança Saúde e Participações?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Alliança Saúde e Participações' to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 8.7%. The solid recent performance means it was also able to grow revenue by 27% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 12% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Alliança Saúde e Participações' P/S is comparable to that of its industry peers. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

What We Can Learn From Alliança Saúde e Participações' P/S?

Its shares have lifted substantially and now Alliança Saúde e Participações' P/S is back within range of the industry median. 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 Alliança Saúde e Participações' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

You always need to take note of risks, for example - Alliança Saúde e Participações has 2 warning signs we think you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.