Fisher & Paykel Healthcare Corporation Limited's (NZSE:FPH) Shares May Have Run Too Fast Too Soon

You may think that with a price-to-sales (or "P/S") ratio of 11.9x Fisher & Paykel Healthcare Corporation Limited (NZSE:FPH) is a stock to avoid completely, seeing as almost half of all the Medical Equipment companies in New Zealand have P/S ratios under 4.2x and even P/S lower than 1.7x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Fisher & Paykel Healthcare

What Does Fisher & Paykel Healthcare's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Fisher & Paykel Healthcare has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Fisher & Paykel Healthcare.

How Is Fisher & Paykel Healthcare's Revenue Growth Trending?

In order to justify its P/S ratio, Fisher & Paykel Healthcare would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 10% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 12% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 13% per annum as estimated by the analysts watching the company. With the industry predicted to deliver 12% growth each year, the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that Fisher & Paykel Healthcare's P/S is higher than its industry peers. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Fisher & Paykel Healthcare's P/S?

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.

Given Fisher & Paykel Healthcare's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You always need to take note of risks, for example - Fisher & Paykel Healthcare has 3 warning signs we think you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.