When close to half the companies in the Healthcare industry in the United States have price-to-sales ratios (or "P/S") below 1.2x, you may consider U.S. Physical Therapy, Inc. (NYSE:USPH) as a stock to potentially avoid with its 2.4x 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.

What Does U.S. Physical Therapy's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, U.S. Physical Therapy has been relatively sluggish. 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.

Is There Enough Revenue Growth Forecasted For U.S. Physical Therapy?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 7.4% last year. This was backed up an excellent period prior to see revenue up by 45% 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 year should generate growth of 8.5% as estimated by the six analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 7.4%, which is not materially different.

With this information, we find it interesting that U.S. Physical Therapy is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On U.S. Physical Therapy's P/S

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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that U.S. Physical Therapy currently trades on a higher than expected P/S. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

Don't forget that there may be other risks. For instance, we've identified 5 warning signs for U.S. Physical Therapy that you should be aware of.

If you're unsure about the strength of U.S. Physical Therapy'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.