You may think that with a price-to-sales (or "P/S") ratio of 2.1x Treace Medical Concepts, Inc. (NASDAQ:TMCI) is a stock worth checking out, seeing as almost half of all the Medical Equipment companies in the United States have P/S ratios greater than 3.1x and even P/S higher than 7x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

How Has Treace Medical Concepts Performed Recently?

Treace Medical Concepts certainly has been doing a good job lately as it's been growing revenue more than most other companies. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

In order to justify its P/S ratio, Treace Medical Concepts would need to produce sluggish growth that's trailing the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 26%. Pleasingly, revenue has also lifted 202% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 11% per year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 10% each year, which is not materially different.

In light of this, it's peculiar that Treace Medical Concepts' P/S sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

What We Can Learn From Treace Medical Concepts' P/S?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It looks to us like the P/S figures for Treace Medical Concepts remain low despite growth that is expected to be in line with other companies in the industry. Despite average revenue growth estimates, there could be some unobserved threats keeping the P/S low. Perhaps investors are concerned that the company could underperform against the forecasts over the near term.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Treace Medical Concepts (1 is a bit concerning!) that you should be aware of before investing here.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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