Trupanion, Inc. (NASDAQ:TRUP) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 30% in the last year.

Although its price has surged higher, it's still not a stretch to say that Trupanion's price-to-sales (or "P/S") ratio of 1.1x right now seems quite "middle-of-the-road" compared to the Insurance industry in the United States, seeing as it matches the P/S ratio of the wider industry. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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

Recent revenue growth for Trupanion has been in line with the industry. Perhaps the market is expecting future revenue performance to show no drastic signs of changing, justifying the P/S being at current levels. Those who are bullish on Trupanion will be hoping that revenue performance can pick up, so that they can pick up the stock at a slightly lower valuation.

Do Revenue Forecasts Match The P/S Ratio?

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

If we review the last year of revenue growth, the company posted a terrific increase of 21%. The strong recent performance means it was also able to grow revenue by 112% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 9.5% per annum during the coming three years according to the seven analysts following the company. With the industry only predicted to deliver 4.5% per year, the company is positioned for a stronger revenue result.

With this information, we find it interesting that Trupanion is trading at a fairly similar P/S compared to the industry. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Key Takeaway

Its shares have lifted substantially and now Trupanion's P/S is back within range of the industry median. 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.

We've established that Trupanion currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. This uncertainty seems to be reflected in the share price which, while stable, could be higher given the revenue forecasts.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Trupanion you should know about.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.