Phreesia, Inc. (NYSE:PHR) shares have had a really impressive month, gaining 43% after a shaky period beforehand.    Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 32% in the last twelve months.  

Since its price has surged higher, you could be forgiven for thinking Phreesia is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.7x, considering almost half the companies in the United States' Healthcare Services industry have P/S ratios below 2x.   Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.  

See our latest analysis for Phreesia

NYSE:PHR Price to Sales Ratio vs Industry December 18th 2023

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

With revenue growth that's superior to most other companies of late, Phreesia has been doing relatively well.   The P/S is probably high because investors think this strong revenue performance will continue.  You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.    

Keen to find out how analysts think Phreesia's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The High P/S?  

In order to justify its P/S ratio, Phreesia 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 29% last year.    The strong recent performance means it was also able to grow revenue by 142% in total over the last three years.  Therefore, it's fair to say the revenue growth recently has been superb for the company.  

Turning to the outlook, the next three years should generate growth of 19%  each year as estimated by the analysts watching the company.  That's shaping up to be materially higher than the 13% each year growth forecast for the broader industry.

With this information, we can see why Phreesia 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.  

The Key Takeaway

The large bounce in Phreesia's shares has lifted the company's P/S handsomely.      Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Phreesia maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Healthcare Services 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 the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.    

We don't want to rain on the parade too much, but we did also find 4 warning signs for Phreesia that you need to be mindful of.  

If these risks are making you reconsider your opinion on Phreesia, 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.