Root, Inc. (NASDAQ:ROOT) Looks Just Right With A 28% Price Jump

Root, Inc. (NASDAQ:ROOT) shares have continued their recent momentum with a 28% gain in the last month alone. The last month tops off a massive increase of 187% in the last year.

Following the firm bounce in price, when almost half of the companies in the United States' Insurance industry have price-to-sales ratios (or "P/S") below 1.1x, you may consider Root as a stock probably not worth researching with its 2x 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 Root

How Has Root Performed Recently?

Root certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. 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 Root.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Root 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 159% last year. The latest three year period has also seen an excellent 241% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 12% per annum during the coming three years according to the six analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 7.2% per year, which is noticeably less attractive.

With this in mind, it's not hard to understand why Root's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Root's P/S

Root's P/S is on the rise since its shares have risen strongly. 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 Root's 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. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Root (1 is a bit concerning!) that you should be aware of.

If these risks are making you reconsider your opinion on Root, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.