You may think that with a price-to-sales (or "P/S") ratio of 23.7x Intuitive Surgical, Inc. (NASDAQ:ISRG) is a stock to avoid completely, seeing as almost half of all the Medical Equipment companies in the United States have P/S ratios under 3.3x and even P/S lower than 1.2x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Intuitive Surgical's P/S Mean For Shareholders?

Recent times have been advantageous for Intuitive Surgical 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is Intuitive Surgical's Revenue Growth Trending?

In order to justify its P/S ratio, Intuitive Surgical would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 15% last year. The latest three year period has also seen an excellent 43% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next three years should generate growth of 15% per annum as estimated by the analysts watching the company. With the industry only predicted to deliver 9.3% each year, the company is positioned for a stronger revenue result.

With this information, we can see why Intuitive Surgical is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does Intuitive Surgical's P/S Mean For Investors?

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.

We've established that Intuitive Surgical maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Medical Equipment industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Intuitive Surgical with six simple checks.

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

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