Phreesia, Inc.'s (NYSE:PHR) Shares Climb 27% But Its Business Is Yet to Catch Up

Phreesia, Inc. (NYSE:PHR) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 9.2% isn't as impressive.

Following the firm bounce in price, when almost half of the companies in the United States' Healthcare Services industry have price-to-sales ratios (or "P/S") below 2.2x, you may consider Phreesia as a stock probably not worth researching with its 3.7x 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 as high as it is.

Check out our latest analysis for Phreesia

How Has Phreesia Performed Recently?

Recent times have been advantageous for Phreesia 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Phreesia.

Is There Enough Revenue Growth Forecasted For Phreesia?

In order to justify its P/S ratio, Phreesia would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 20% last year. Pleasingly, revenue has also lifted 106% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 12% each year during the coming three years according to the analysts following the company. With the industry predicted to deliver 11% growth per annum, the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that Phreesia's P/S is higher than its industry peers. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Bottom Line On Phreesia's P/S

Phreesia's P/S is on the rise since its shares have risen strongly. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Given Phreesia's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for Phreesia you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.