Sonoma Pharmaceuticals, Inc. (NASDAQ:SNOA) Screens Well But There Might Be A Catch

Sonoma Pharmaceuticals, Inc.'s (NASDAQ:SNOA) price-to-sales (or "P/S") ratio of 0.4x might make it look like a strong buy right now compared to the Pharmaceuticals industry in the United States, where around half of the companies have P/S ratios above 4.8x and even P/S above 18x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

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Check out our latest analysis for Sonoma Pharmaceuticals

What Does Sonoma Pharmaceuticals' Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Sonoma Pharmaceuticals has been relatively sluggish. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

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

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Sonoma Pharmaceuticals would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered an exceptional 17% gain to the company's top line. As a result, it also grew revenue by 15% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 23% over the next year. That's shaping up to be similar to the 22% growth forecast for the broader industry.

With this in consideration, we find it intriguing that Sonoma Pharmaceuticals' P/S is lagging behind its industry peers. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Final Word

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 seen that Sonoma Pharmaceuticals currently trades on a lower than expected P/S since its forecast growth is in line with the wider industry. The low P/S could be an indication that the revenue growth estimates are being questioned by the market. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

Before you take the next step, you should know about the 4 warning signs for Sonoma Pharmaceuticals (3 make us uncomfortable!) that we have uncovered.

If these risks are making you reconsider your opinion on Sonoma Pharmaceuticals, 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.