iRhythm Technologies, Inc.'s (NASDAQ:IRTC) Business Is Trailing The Industry But Its Shares Aren't

With a price-to-sales (or "P/S") ratio of 6.8x iRhythm Technologies, Inc. (NASDAQ:IRTC) may be sending very bearish signals at the moment, given that almost half of all the Medical Equipment companies in the United States have P/S ratios under 3.4x and even P/S lower than 1.3x are not unusual. 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 iRhythm Technologies

How iRhythm Technologies Has Been Performing

Recent times have been advantageous for iRhythm Technologies as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like iRhythm Technologies' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 20%. The latest three year period has also seen an excellent 86% 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.

Looking ahead now, revenue is anticipated to climb by 18% each year during the coming three years according to the twelve analysts following the company. With the industry predicted to deliver 79% growth per annum, the company is positioned for a weaker revenue result.

In light of this, it's alarming that iRhythm Technologies' P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 Bottom Line On iRhythm Technologies' P/S

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've concluded that iRhythm Technologies currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. 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 1 warning sign for iRhythm Technologies that we have uncovered.

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).

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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.