Investors Still Waiting For A Pull Back In OrthoPediatrics Corp. (NASDAQ:KIDS)

You may think that with a price-to-sales (or "P/S") ratio of 4x OrthoPediatrics Corp. (NASDAQ:KIDS) is a stock to potentially avoid, seeing as almost half of all the Medical Equipment companies in the United States have P/S ratios under 3.3x and even P/S lower than 1.2x aren't out of the ordinary. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for OrthoPediatrics

What Does OrthoPediatrics' P/S Mean For Shareholders?

Recent times have been advantageous for OrthoPediatrics as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. 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 OrthoPediatrics will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For OrthoPediatrics?

In order to justify its P/S ratio, OrthoPediatrics would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 28% last year. Pleasingly, revenue has also lifted 96% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 20% per annum as estimated by the seven analysts watching the company. That's shaping up to be materially higher than the 9.3% per annum growth forecast for the broader industry.

In light of this, it's understandable that OrthoPediatrics' P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On OrthoPediatrics' 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 established that OrthoPediatrics maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Medical Equipment industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 3 warning signs for OrthoPediatrics that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.