There's No Escaping MultiPlan Corporation's (NYSE:MPLN) Muted Revenues Despite A 29% Share Price Rise

MultiPlan Corporation (NYSE:MPLN) shares have continued their recent momentum with a 29% gain in the last month alone. But the last month did very little to improve the 55% share price decline over the last year.

Although its price has surged higher, MultiPlan's price-to-sales (or "P/S") ratio of 0.3x might still make it look like a strong buy right now compared to the wider Healthcare Services industry in the United States, where around half of the companies have P/S ratios above 2.3x and even P/S above 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

See our latest analysis for MultiPlan

How Has MultiPlan Performed Recently?

MultiPlan hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

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

MultiPlan's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Retrospectively, the last year delivered a frustrating 1.7% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 12% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the two analysts covering the company suggest revenue growth is heading into negative territory, declining 0.2% over the next year. That's not great when the rest of the industry is expected to grow by 9.8%.

In light of this, it's understandable that MultiPlan's P/S would sit below the majority of other companies. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On MultiPlan's P/S

MultiPlan's recent share price jump still sees fails to bring its P/S alongside the industry median. 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 MultiPlan's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, MultiPlan's poor outlook justifies its low P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with MultiPlan (at least 1 which doesn't sit too well with us), and understanding them should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.