There's Reason For Concern Over Sonida Senior Living, Inc.'s (NYSE:SNDA) Massive 164% Price Jump

Despite an already strong run, Sonida Senior Living, Inc. (NYSE:SNDA) shares have been powering on, with a gain of 164% in the last thirty days. The annual gain comes to 226% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given close to half the companies operating in the United States' Healthcare industry have price-to-sales ratios (or "P/S") below 1x, you may consider Sonida Senior Living as a stock to potentially avoid with its 1.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Sonida Senior Living

What Does Sonida Senior Living's Recent Performance Look Like?

Sonida Senior Living has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Sonida Senior Living will help you shine a light on its historical performance.

How Is Sonida Senior Living's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a worthy increase of 10%. However, this wasn't enough as the latest three year period has seen an unpleasant 43% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 8.0% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Sonida Senior Living's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Sonida Senior Living's P/S Mean For Investors?

The large bounce in Sonida Senior Living's shares has lifted the company's P/S handsomely. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Sonida Senior Living currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Sonida Senior Living that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.