There wouldn't be many who think Prestige Consumer Healthcare Inc.'s (NYSE:PBH) price-to-sales (or "P/S") ratio of 3.2x is worth a mention when the median P/S for the Pharmaceuticals industry in the United States is similar at about 3x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

What Does Prestige Consumer Healthcare's P/S Mean For Shareholders?

Prestige Consumer Healthcare 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 moderate because investors think this lacklustre revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Prestige Consumer Healthcare's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Prestige Consumer Healthcare's to be considered reasonable.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Fortunately, a few good years before that means that it was still able to grow revenue by 19% in total over the last three years. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 2.0% per annum during the coming three years according to the seven analysts following the company. With the industry predicted to deliver 46% growth per year, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Prestige Consumer Healthcare's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Prestige Consumer Healthcare's P/S

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.

When you consider that Prestige Consumer Healthcare's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

Before you take the next step, you should know about the 2 warning signs for Prestige Consumer Healthcare that we have uncovered.

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

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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.