Why We're Not Concerned Yet About Delcath Systems, Inc.'s (NASDAQ:DCTH) 29% Share Price Plunge

Delcath Systems, Inc. (NASDAQ:DCTH) shares have retraced a considerable 29% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 41%, which is great even in a bull market.

Although its price has dipped substantially, given around half the companies in the United States' Medical Equipment industry have price-to-sales ratios (or "P/S") below 2.7x, you may still consider Delcath Systems as a stock to avoid entirely with its 7.1x 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 so lofty.

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See our latest analysis for Delcath Systems

What Does Delcath Systems' P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Delcath Systems has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Delcath Systems will help you uncover what's on the horizon.

How Is Delcath Systems' Revenue Growth Trending?

Delcath Systems' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months. Spectacularly, three year revenue growth has also set the world alight, thanks to the last 12 months of incredible growth. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 47% per year during the coming three years according to the six analysts following the company. That's shaping up to be materially higher than the 9.9% each year growth forecast for the broader industry.

With this in mind, it's not hard to understand why Delcath Systems' 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.

The Key Takeaway

Even after such a strong price drop, Delcath Systems' P/S still exceeds the industry median significantly. 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.

As we suspected, our examination of Delcath Systems' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Before you take the next step, you should know about the 1 warning sign for Delcath Systems that we have uncovered.

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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.