Despite an already strong run, American Coastal Insurance Corporation (NASDAQ:ACIC) shares have been powering on, with a gain of 29% in the last thirty days. This latest share price bounce rounds out a remarkable 658% gain over the last twelve months.

Even after such a large jump in price, it's still not a stretch to say that American Coastal Insurance's price-to-sales (or "P/S") ratio of 1.1x right now seems quite "middle-of-the-road" compared to the Insurance industry in the United States, where the median P/S ratio is around 1x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

How Has American Coastal Insurance Performed Recently?

Recent times have been advantageous for American Coastal Insurance as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like American Coastal Insurance's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company grew revenue by an impressive 40% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 40% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the only analyst covering the company suggest revenue growth is heading into negative territory, declining 36% over the next year. That's not great when the rest of the industry is expected to grow by 7.0%.

With this information, we find it concerning that American Coastal Insurance is trading at a fairly similar P/S compared to the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Bottom Line On American Coastal Insurance's P/S

American Coastal Insurance's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our check of American Coastal Insurance's analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for American Coastal Insurance that you should be aware of.

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.