Star Health and Allied Insurance Company Limited's (NSE:STARHEALTH) Price In Tune With Revenues

When close to half the companies in the Insurance industry in India have price-to-sales ratios (or "P/S") below 1.5x, you may consider Star Health and Allied Insurance Company Limited (NSE:STARHEALTH) as a stock to potentially avoid with its 2.5x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Star Health and Allied Insurance

How Star Health and Allied Insurance Has Been Performing

With revenue growth that's superior to most other companies of late, Star Health and Allied Insurance has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Star Health and Allied Insurance.

What Are Revenue Growth Metrics Telling Us About The High P/S?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Star Health and Allied Insurance's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 14% last year. Pleasingly, revenue has also lifted 143% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 22% each year over the next three years. With the industry only predicted to deliver 12% per annum, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Star Health and Allied Insurance's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Star Health and Allied Insurance's P/S?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Star Health and Allied Insurance maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Insurance industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Star Health and Allied Insurance with six simple checks on some of these key factors.

If you're unsure about the strength of Star Health and Allied Insurance'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.