iCAD, Inc. (NASDAQ:ICAD) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

iCAD, Inc. (NASDAQ:ICAD) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 38% in the last twelve months.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about iCAD's P/S ratio of 1.8x, since the median price-to-sales (or "P/S") ratio for the Healthcare Services industry in the United States is about the same. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for iCAD

How iCAD Has Been Performing

Recent times haven't been great for iCAD as its revenue has been rising slower than most other companies. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, iCAD would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 10%. Still, lamentably revenue has fallen 11% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 8.1% per year over the next three years. That's shaping up to be materially lower than the 14% per annum growth forecast for the broader industry.

With this in mind, we find it intriguing that iCAD's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now iCAD's P/S is back within range of the industry median. 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 that iCAD's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with iCAD, and understanding them should be part of your investment process.

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