Why Investors Shouldn't Be Surprised By OrthoPediatrics Corp.'s (NASDAQ:KIDS) P/S

With a price-to-sales (or "P/S") ratio of 4.9x OrthoPediatrics Corp. (NASDAQ:KIDS) may be sending bearish signals at the moment, given that almost half of all Medical Equipment companies in the United States have P/S ratios under 3.3x and even P/S lower than 1.3x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for OrthoPediatrics

How Has OrthoPediatrics Performed Recently?

OrthoPediatrics 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.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on OrthoPediatrics.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 22% gain to the company's top line. Pleasingly, revenue has also lifted 109% 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.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 23% per year over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 10% per annum, which is noticeably less attractive.

With this information, we can see why OrthoPediatrics is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On OrthoPediatrics' P/S

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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. 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.

It is also worth noting that we have found 4 warning signs for OrthoPediatrics (1 is concerning!) that you need to take into consideration.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.