Some Shareholders Feeling Restless Over NovoCure Limited's (NASDAQ:NVCR) P/S Ratio

It's not a stretch to say that NovoCure Limited's (NASDAQ:NVCR) price-to-sales (or "P/S") ratio of 3.4x right now seems quite "middle-of-the-road" for companies in the Medical Equipment industry in the United States, where the median P/S ratio is around 3.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for NovoCure

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

NovoCure could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

How Is NovoCure's Revenue Growth Trending?

In order to justify its P/S ratio, NovoCure would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 5.3% decrease to the company's top line. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 7.3% each year as estimated by the seven analysts watching the company. With the industry predicted to deliver 9.5% growth per year, the company is positioned for a weaker revenue result.

In light of this, it's curious that NovoCure's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On NovoCure's P/S

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our look at the analysts forecasts of NovoCure's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

Having said that, be aware NovoCure is showing 2 warning signs in our investment analysis, you should know about.

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.