Profound Medical Corp. (TSE:PRN) Stock Rockets 25% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Profound Medical Corp. (TSE:PRN) shares have been powering on, with a gain of 25% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 2.5% isn't as attractive.

Since its price has surged higher, given close to half the companies operating in Canada's Medical Equipment industry have price-to-sales ratios (or "P/S") below 13.4x, you may consider Profound Medical as a stock to potentially avoid with its 16.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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See our latest analysis for Profound Medical

How Profound Medical Has Been Performing

Profound Medical could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Profound Medical's is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that the company grew revenue by an impressive 68% last year. The strong recent performance means it was also able to grow revenue by 123% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 71% each year as estimated by the five analysts watching the company. With the industry predicted to deliver 121% growth per year, the company is positioned for a weaker revenue result.

In light of this, it's alarming that Profound Medical's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

The large bounce in Profound Medical's shares has lifted the company's P/S handsomely. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Profound Medical, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 1 warning sign for Profound Medical that you should be aware of.

If you're unsure about the strength of Profound Medical'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.