Certara, Inc.'s (NASDAQ:CERT) 26% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio
Certara, Inc. (NASDAQ:CERT) shares have had a horrible month, losing 26% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 49% share price drop.
Even after such a large drop in price, given close to half the companies operating in the United States' Healthcare Services industry have price-to-sales ratios (or "P/S") below 2.2x, you may still consider Certara as a stock to potentially avoid with its 2.7x P/S ratio. 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 Certara
How Has Certara Performed Recently?
Certara could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Want the full picture on analyst estimates for the company? Then our free report on Certara will help you uncover what's on the horizon.How Is Certara's Revenue Growth Trending?
There's an inherent assumption that a company should outperform the industry for P/S ratios like Certara's to be considered reasonable.
Retrospectively, the last year delivered a decent 11% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 28% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.
Looking ahead now, revenue is anticipated to climb by 7.1% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 13% each year growth forecast for the broader industry.
With this information, we find it concerning that Certara is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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
Despite the recent share price weakness, Certara's P/S remains higher than most other companies in the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
It comes as a surprise to see Certara trade at such a high P/S given the revenue forecasts look less than stellar. 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.
It is also worth noting that we have found 1 warning sign for Certara that you need to take into consideration.
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.