NovoCure Limited (NASDAQ:NVCR) shareholders have had their patience rewarded with a 84% share price jump in the last month. The last month tops off a massive increase of 130% in the last year.

Following the firm bounce in price, NovoCure's price-to-sales (or "P/S") ratio of 5.6x might make it look like a strong sell right now compared to other companies in the Medical Equipment industry in the United States, where around half of the companies have P/S ratios below 3.4x and even P/S below 1.3x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Has NovoCure Performed Recently?

Recent times have been advantageous for NovoCure as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like NovoCure's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 15%. The solid recent performance means it was also able to grow revenue by 5.9% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Looking ahead now, revenue is anticipated to climb by 11% per annum during the coming three years according to the eight analysts following the company. With the industry only predicted to deliver 9.2% per year, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why NovoCure's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does NovoCure's P/S Mean For Investors?

The strong share price surge has lead to NovoCure'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.

Our look into NovoCure shows that its P/S ratio remains high on the merit of its strong future revenues. 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.

It is also worth noting that we have found 2 warning signs for NovoCure (1 is potentially serious!) that you need to take into consideration.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.