You may think that with a price-to-sales (or "P/S") ratio of 9.2x SANUWAVE Health, Inc. (NASDAQ:SNWV) is a stock to avoid completely, seeing as almost half of all the Medical Equipment companies in the United States have P/S ratios under 3.4x and even P/S lower than 1.2x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for SANUWAVE Health

What Does SANUWAVE Health's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, SANUWAVE Health has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for SANUWAVE Health, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is SANUWAVE Health's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as SANUWAVE Health's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company grew revenue by an impressive 55% last year. The strong recent performance means it was also able to grow revenue by 161% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 8.7% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why SANUWAVE Health is trading at such a high P/S compared to the industry. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

The Key Takeaway

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.

As we suspected, our examination of SANUWAVE Health revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

Before you settle on your opinion, we've discovered 2 warning signs for SANUWAVE Health that you should be aware of.

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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