Waterdrop Inc. (NYSE:WDH) Not Lagging Industry On Growth Or Pricing

Waterdrop Inc.'s (NYSE:WDH) price-to-sales (or "P/S") ratio of 2.3x may not look like an appealing investment opportunity when you consider close to half the companies in the Insurance industry in the United States have P/S ratios below 0.9x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Waterdrop

What Does Waterdrop's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Waterdrop's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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

Do Revenue Forecasts Match The High P/S Ratio?

Waterdrop's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered a frustrating 7.1% decrease to the company's top line. Even so, admirably revenue has lifted 83% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 14% per year during the coming three years according to the three analysts following the company. With the industry only predicted to deliver 3.2% each year, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Waterdrop'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 Waterdrop's P/S

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 Waterdrop's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Waterdrop with six simple checks will allow you to discover any risks that could be an issue.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.