To the annoyance of some shareholders, MultiPlan Corporation (NYSE:MPLN) shares are down a considerable 28% in the last month, which continues a horrid run for the company.    The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 74% loss during that time.  

Since its price has dipped substantially, MultiPlan's price-to-sales (or "P/S") ratio of 0.3x might make it look like a buy right now compared to the Healthcare Services industry in the United States, where around half of the companies have P/S ratios above 2.3x and even P/S above 6x are quite common.   Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.  

NYSE:MPLN Price to Sales Ratio vs Industry June 5th 2024

How Has MultiPlan Performed Recently?

MultiPlan hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average.   It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio.  So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.    

If you'd like to see what analysts are forecasting going forward, you should check out our free report on MultiPlan.

Do Revenue Forecasts Match The Low P/S Ratio?  

MultiPlan's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.  

Retrospectively, the last year delivered a frustrating 5.8% decrease to the company's top line.   At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth.  Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.  

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 6.7% over the next year.  That's shaping up to be materially lower than the 9.6% growth forecast for the broader industry.

With this in consideration, its clear as to why MultiPlan's P/S is falling short industry peers.  Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.  

The Final Word

MultiPlan's P/S has taken a dip along with its share price.      Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of MultiPlan's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S.  At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio.  The company will need a change of fortune to justify the P/S rising higher in the future.    

We don't want to rain on the parade too much, but we did also find 2 warning signs for MultiPlan that you need to be mindful of.  

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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.