iRhythm Technologies, Inc. (NASDAQ:IRTC) Stocks Shoot Up 25% But Its P/S Still Looks Reasonable

iRhythm Technologies, Inc. (NASDAQ:IRTC) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Unfortunately, despite the strong performance over the last month, the full year gain of 8.2% isn't as attractive.

Since its price has surged higher, you could be forgiven for thinking iRhythm Technologies is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.8x, considering almost half the companies in the United States' Medical Equipment industry have P/S ratios below 3.3x. 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 iRhythm Technologies

How iRhythm Technologies Has Been Performing

iRhythm Technologies certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. 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 iRhythm Technologies will help you uncover what's on the horizon.

How Is iRhythm Technologies' Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a terrific increase of 24%. The latest three year period has also seen an excellent 93% 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 three years should generate growth of 18% each year as estimated by the twelve analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 9.8% each year, which is noticeably less attractive.

With this in mind, it's not hard to understand why iRhythm Technologies' P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From iRhythm Technologies' P/S?

Shares in iRhythm Technologies have seen a strong upwards swing lately, which has really helped boost its P/S figure. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of iRhythm Technologies' 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. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for iRhythm Technologies you should know about.

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