Why We're Not Concerned Yet About Inari Medical, Inc.'s (NASDAQ:NARI) 25% Share Price Plunge

Unfortunately for some shareholders, the Inari Medical, Inc. (NASDAQ:NARI) share price has dived 25% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 25% share price drop.

Although its price has dipped substantially, Inari Medical may still be sending sell signals at present with a price-to-sales (or "P/S") ratio of 5x, when you consider almost half of the companies in the Medical Equipment industry in the United States have P/S ratios under 3.5x and even P/S lower than 1.3x 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.

Check out our latest analysis for Inari Medical

What Does Inari Medical's P/S Mean For Shareholders?

Recent times have been advantageous for Inari Medical 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.

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

How Is Inari Medical's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 29% last year. Pleasingly, revenue has also lifted 253% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 18% per year during the coming three years according to the ten analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 9.5% per annum, which is noticeably less attractive.

In light of this, it's understandable that Inari Medical's 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.

What We Can Learn From Inari Medical's P/S?

Despite the recent share price weakness, Inari Medical's P/S remains higher than most other companies in the industry. 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.

As we suspected, our examination of Inari Medical's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 1 warning sign for Inari Medical that you need to take into consideration.

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.