There's Reason For Concern Over Sedana Medical AB (publ)'s (STO:SEDANA) Massive 27% Price Jump

Sedana Medical AB (publ) (STO:SEDANA) shares have continued their recent momentum with a 27% 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 51% share price drop in the last twelve months.

Since its price has surged higher, Sedana Medical's price-to-sales (or "P/S") ratio of 6.9x might make it look like a sell right now compared to the wider Medical Equipment industry in Sweden, where around half of the companies have P/S ratios below 4.9x and even P/S below 2x are quite common. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Sedana Medical

What Does Sedana Medical's Recent Performance Look Like?

Sedana Medical's revenue growth of late has been pretty similar to most other companies. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Sedana Medical's future stacks up against the industry? In that case, our free report is a great place to start.

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

In order to justify its P/S ratio, Sedana Medical would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 14% last year. Revenue has also lifted 27% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Looking ahead now, revenue is anticipated to climb by 15% during the coming year according to the only analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 51%, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Sedana Medical's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Sedana Medical's P/S is on the rise since its shares have risen strongly. 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.

It comes as a surprise to see Sedana Medical trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 3 warning signs for Sedana Medical (1 makes us a bit uncomfortable!) that we have uncovered.

If these risks are making you reconsider your opinion on Sedana Medical, 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.