Shareholders Should Be Pleased With Silk Road Medical, Inc's (NASDAQ:SILK) Price

You may think that with a price-to-sales (or "P/S") ratio of 11.7x Silk Road Medical, Inc (NASDAQ:SILK) is a stock to avoid completely, seeing as almost half of all the Medical Equipment companies in the United States have P/S ratios under 3.5x and even P/S lower than 1.4x aren't out of the ordinary. 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.

View our latest analysis for Silk Road Medical

How Silk Road Medical Has Been Performing

Recent times have been advantageous for Silk Road 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Silk Road Medical will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Silk Road Medical?

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

Taking a look back first, we see that the company grew revenue by an impressive 37% last year. The strong recent performance means it was also able to grow revenue by 119% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 25% per annum during the coming three years according to the seven analysts following the company. With the industry only predicted to deliver 9.9% each year, the company is positioned for a stronger revenue result.

With this information, we can see why Silk Road Medical 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 Key Takeaway

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.

As we suspected, our examination of Silk Road Medical's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 3 warning signs for Silk Road Medical you should be aware of.

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.