To the annoyance of some shareholders, Definitive Healthcare Corp. (NASDAQ:DH) shares are down a considerable 25% in the last month, which continues a horrid run for the company.    For any long-term shareholders, the last month ends a year to forget by locking in a 52% share price decline.  

Even after such a large drop in price, it's still not a stretch to say that Definitive Healthcare's price-to-sales (or "P/S") ratio of 2.4x right now seems quite "middle-of-the-road" compared to the Healthcare Services industry in the United States, seeing as it matches the P/S ratio of the wider industry.  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.    

NasdaqGS:DH Price to Sales Ratio vs Industry June 4th 2024

How Has Definitive Healthcare Performed Recently?

Definitive Healthcare's revenue growth of late has been pretty similar to most other companies.   Perhaps the market is expecting future revenue performance to show no drastic signs of changing, justifying the P/S being at current levels.  If this is the case, then at least existing shareholders won't be losing sleep over the current share price.    

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Definitive Healthcare.

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

Definitive Healthcare's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.  

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 100% overall rise in revenue, aided somewhat by its short-term performance.  Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.  

Shifting to the future, estimates from the twelve analysts covering the company suggest revenue should grow by 2.5% over the next year.  That's shaping up to be materially lower than the 11% growth forecast for the broader industry.

With this in mind, we find it intriguing that Definitive 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.  Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.  

What We Can Learn From Definitive Healthcare's P/S?

With its share price dropping off a cliff, the P/S for Definitive Healthcare looks to be in line with the rest of the Healthcare Services industry.      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.

When you consider that Definitive 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.  When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower.  This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.    

You always need to take note of risks, for example - Definitive Healthcare has 1 warning sign  we think you should be aware of.  

If you're unsure about the strength of Definitive Healthcare'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.