NeuroPace, Inc. (NASDAQ:NPCE) Looks Just Right With A 26% Price Jump

Despite an already strong run, NeuroPace, Inc. (NASDAQ:NPCE) shares have been powering on, with a gain of 26% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.8% in the last twelve months.

Following the firm bounce in price, NeuroPace may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 5.5x, since almost half of all companies in the Medical Equipment in the United States have P/S ratios under 3.6x 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.

View our latest analysis for NeuroPace

What Does NeuroPace's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, NeuroPace has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is NeuroPace's Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 27% gain to the company's top line. Pleasingly, revenue has also lifted 70% 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.

Looking ahead now, revenue is anticipated to climb by 24% per year during the coming three years according to the seven analysts following the company. That's shaping up to be materially higher than the 9.7% each year growth forecast for the broader industry.

In light of this, it's understandable that NeuroPace'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.

The Key Takeaway

NeuroPace's P/S is on the rise since its shares have risen strongly. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that NeuroPace 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. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for NeuroPace you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.