With a price-to-sales (or "P/S") ratio of 11.9x Impinj, Inc. (NASDAQ:PI) may be sending very bearish signals at the moment, given that almost half of all the Semiconductor companies in the United States have P/S ratios under 4.2x and even P/S lower than 1.6x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

What Does Impinj's P/S Mean For Shareholders?

Recent times haven't been great for Impinj as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Impinj's Revenue Growth Trending?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 10% last year. The latest three year period has also seen an excellent 98% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the ten analysts covering the company suggest revenue should grow by 25% per year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 25% each year, which is not materially different.

With this information, we find it interesting that Impinj is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

What Does Impinj's P/S Mean For Investors?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Given Impinj's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 4 warning signs for Impinj you should be aware of.

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.