The RxSight, Inc. (NASDAQ:RXST) share price has fared very poorly over the last month, falling by a substantial 25%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 15% in that time.

In spite of the heavy fall in price, RxSight's price-to-sales (or "P/S") ratio of 10.8x might still 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 3.3x and even P/S below 1.2x are quite common. 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.

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

Recent times have been advantageous for RxSight as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

Taking a look back first, we see that the company grew revenue by an impressive 68% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 28% per annum as estimated by the ten analysts watching the company. With the industry only predicted to deliver 9.4% per year, the company is positioned for a stronger revenue result.

With this information, we can see why RxSight is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

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

A significant share price dive has done very little to deflate RxSight's very lofty P/S. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of RxSight's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for RxSight 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.