Getting In Cheap On Inspire Medical Systems, Inc. (NYSE:INSP) Might Be Difficult

You may think that with a price-to-sales (or "P/S") ratio of 7.5x Inspire Medical Systems, Inc. (NYSE:INSP) 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 3.6x and even P/S lower than 1.3x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Inspire Medical Systems

How Has Inspire Medical Systems Performed Recently?

Inspire Medical Systems certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

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

If we review the last year of revenue growth, the company posted a terrific increase of 33%. The strong recent performance means it was also able to grow revenue by 276% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 19% each year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 9.4% each year growth forecast for the broader industry.

With this information, we can see why Inspire Medical Systems is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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.

As we suspected, our examination of Inspire Medical Systems' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Inspire Medical Systems with six simple checks on some of these key factors.

If you're unsure about the strength of Inspire Medical Systems' 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.