Inari Medical, Inc.'s (NASDAQ:NARI) price-to-sales (or "P/S") ratio of 4.6x might make it look like a sell right now compared to the Medical Equipment industry in the United States, where around half of the companies have P/S ratios below 3.3x and even P/S below 1.2x are quite common. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Inari Medical's Recent Performance Look Like?

Inari Medical certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Inari Medical?

In order to justify its P/S ratio, Inari Medical would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 25% last year. The strong recent performance means it was also able to grow revenue by 163% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 18% per year during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 9.2% per year growth forecast for the broader industry.

With this information, we can see why Inari Medical is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does Inari Medical's P/S Mean For Investors?

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 established that Inari Medical maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Medical Equipment industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Inari Medical with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Inari Medical, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.