Root, Inc. (NASDAQ:ROOT) Stock Rockets 74% But Many Are Still Ignoring The Company

Root, Inc. (NASDAQ:ROOT) shareholders would be excited to see that the share price has had a great month, posting a 74% gain and recovering from prior weakness. This latest share price bounce rounds out a remarkable 588% gain over the last twelve months.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Root's P/S ratio of 1x, since the median price-to-sales (or "P/S") ratio for the Insurance industry in the United States is also close to 1.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Root

How Root Has Been Performing

Recent times have been advantageous for Root as its revenues have been rising faster than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

How Is Root's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Root's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered an exceptional 215% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 245% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 12% each year over the next three years. That's shaping up to be materially higher than the 5.1% per annum growth forecast for the broader industry.

With this information, we find it interesting that Root is trading at a fairly similar P/S compared to the industry. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Key Takeaway

Root appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

Despite enticing revenue growth figures that outpace the industry, Root's P/S isn't quite what we'd expect. Perhaps uncertainty in the revenue forecasts are what's keeping the P/S ratio consistent with the rest of the industry. It appears some are indeed anticipating revenue instability, because these conditions should normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Root (2 are a bit unpleasant) 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.