The Price Is Right For Phreesia, Inc. (NYSE:PHR)

When close to half the companies in the Healthcare Services industry in the United States have price-to-sales ratios (or "P/S") below 2.5x, you may consider Phreesia, Inc. (NYSE:PHR) as a stock to potentially avoid with its 3.6x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Phreesia

What Does Phreesia's Recent Performance Look Like?

Phreesia certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For Phreesia?

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

Taking a look back first, we see that the company grew revenue by an impressive 27% last year. Pleasingly, revenue has also lifted 140% 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 18% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 13% per year, which is noticeably less attractive.

In light of this, it's understandable that Phreesia's 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.

What We Can Learn From Phreesia's P/S?

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.

Our look into Phreesia shows that its P/S ratio remains high on the merit of its strong future revenues. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Phreesia, and understanding them should be part of your investment process.

If you're unsure about the strength of Phreesia's 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.