Root, Inc. (NASDAQ:ROOT) Stock's 30% Dive Might Signal An Opportunity But It Requires Some Scrutiny

The Root, Inc. (NASDAQ:ROOT) share price has softened a substantial 30% over the previous 30 days, handing back much of the gains the stock has made lately. Nonetheless, the last 30 days have barely left a scratch on the stock's annual performance, which is up a whopping 560%.

Even after such a large drop in price, there still wouldn't be many who think Root's price-to-sales (or "P/S") ratio of 1x is worth a mention when the median P/S in the United States' Insurance industry is similar at about 1.1x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Root

What Does Root's Recent Performance Look Like?

Recent times have been advantageous for Root as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

Keen to find out how analysts think Root's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Root's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a terrific increase of 215%. 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% per annum over the next three years. That's shaping up to be materially higher than the 5.2% per annum growth forecast for the broader industry.

With this in consideration, we find it intriguing that Root's P/S is closely matching its industry peers. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Bottom Line On Root's P/S

With its share price dropping off a cliff, the P/S for Root looks to be in line with the rest of the Insurance industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Root currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. This uncertainty seems to be reflected in the share price which, while stable, could be higher given the revenue forecasts.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Root (1 is a bit unpleasant!) that you should be aware of before investing here.

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).

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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.