Revenues Tell The Story For MediWound Ltd. (NASDAQ:MDWD) As Its Stock Soars 25%

MediWound Ltd. (NASDAQ:MDWD) shares have continued their recent momentum with a 25% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 78% in the last year.

Since its price has surged higher, MediWound may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 9.4x, since almost half of all companies in the Pharmaceuticals industry in the United States have P/S ratios under 3x and even P/S lower than 0.9x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for MediWound

What Does MediWound's Recent Performance Look Like?

MediWound could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on MediWound will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 29%. As a result, revenue from three years ago have also fallen 14% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 42% per year as estimated by the four analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 20% per annum, which is noticeably less attractive.

With this information, we can see why MediWound is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

The strong share price surge has lead to MediWound's P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of MediWound'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 the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for MediWound with six simple checks.

If you're unsure about the strength of MediWound's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.