Simulations Plus, Inc.'s (NASDAQ:SLP) 25% Jump Shows Its Popularity With Investors

Simulations Plus, Inc. (NASDAQ:SLP) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 30% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking Simulations Plus is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.4x, considering almost half the companies in the United States' Healthcare Services industry have P/S ratios below 2.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for Simulations Plus

How Simulations Plus Has Been Performing

With revenue growth that's superior to most other companies of late, Simulations Plus has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

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

Taking a look back first, we see that the company grew revenue by an impressive 22% last year. The latest three year period has also seen an excellent 58% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 17% per year over the next three years. With the industry only predicted to deliver 11% each year, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Simulations Plus' 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 Final Word

Simulations Plus' P/S has grown nicely over the last month thanks to a handy boost in the share price. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Simulations Plus' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Simulations Plus , and understanding should be part of your investment process.

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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.