There's Reason For Concern Over RadNet, Inc.'s (NASDAQ:RDNT) Massive 26% Price Jump

RadNet, Inc. (NASDAQ:RDNT) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 200% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, when almost half of the companies in the United States' Healthcare industry have price-to-sales ratios (or "P/S") below 1.2x, you may consider RadNet as a stock not worth researching with its 3.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for RadNet

How Has RadNet Performed Recently?

RadNet 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. 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 RadNet will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The High P/S?

RadNet's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 12%. The latest three year period has also seen an excellent 37% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 7.3% over the next year. Meanwhile, the rest of the industry is forecast to expand by 7.5%, which is not materially different.

With this in consideration, we find it intriguing that RadNet's P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

RadNet's P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Analysts are forecasting RadNet's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

You always need to take note of risks, for example - RadNet has 2 warning signs we think you should be aware of.

If you're unsure about the strength of RadNet's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.