RxSight, Inc. (NASDAQ:RXST) shareholders would be excited to see that the share price has had a great month, posting a 45% gain and recovering from prior weakness. The last month tops off a massive increase of 205% in the last year.

Since its price has surged higher, when almost half of the companies in the United States' Medical Equipment industry have price-to-sales ratios (or "P/S") below 3.2x, you may consider RxSight as a stock not worth researching with its 17.6x P/S ratio. 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.

Check out our latest analysis for RxSight

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

With revenue growth that's superior to most other companies of late, RxSight 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.

How Is RxSight's Revenue Growth Trending?

In order to justify its P/S ratio, RxSight would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 85% last year. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 47% as estimated by the eight analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 8.7%, which is noticeably less attractive.

In light of this, it's understandable that RxSight's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has lead to RxSight's P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that RxSight 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. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for RxSight you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.