Getting In Cheap On HealthEquity, Inc. (NASDAQ:HQY) Might Be Difficult

When you see that almost half of the companies in the Healthcare industry in the United States have price-to-sales ratios (or "P/S") below 1.2x, HealthEquity, Inc. (NASDAQ:HQY) looks to be giving off strong sell signals with its 6.4x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for HealthEquity

What Does HealthEquity's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, HealthEquity has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. 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 HealthEquity.

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

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

Retrospectively, the last year delivered an exceptional 16% gain to the company's top line. The latest three year period has also seen an excellent 43% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 16% as estimated by the analysts watching the company. That's shaping up to be materially higher than the 7.6% growth forecast for the broader industry.

In light of this, it's understandable that HealthEquity's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

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 HealthEquity's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for HealthEquity with six simple checks on some of these key factors.

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.