To the annoyance of some shareholders, Definitive Healthcare Corp. (NASDAQ:DH) shares are down a considerable 34% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 69% share price decline.

Even after such a large drop in price, it's still not a stretch to say that Definitive Healthcare's price-to-sales (or "P/S") ratio of 1.6x right now seems quite "middle-of-the-road" compared to the Healthcare Services industry in the United States, where the median P/S ratio is around 2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Definitive Healthcare's P/S Mean For Shareholders?

Recent times haven't been great for Definitive Healthcare as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

How Is Definitive Healthcare's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Definitive Healthcare's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 10%. This was backed up an excellent period prior to see revenue up by 100% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the twelve analysts covering the company suggest revenue should grow by 0.7% over the next year. That's shaping up to be materially lower than the 9.7% growth forecast for the broader industry.

In light of this, it's curious that Definitive Healthcare's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

With its share price dropping off a cliff, the P/S for Definitive Healthcare looks to be in line with the rest of the Healthcare Services industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

When you consider that Definitive Healthcare's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

You should always think about risks. Case in point, we've spotted 1 warning sign for Definitive Healthcare you should be aware of.

If these risks are making you reconsider your opinion on Definitive Healthcare, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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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