American Coastal Insurance Corporation (NASDAQ:ACIC) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. The last month tops off a massive increase of 121% in the last year.

After such a large jump in price, when almost half of the companies in the United States' Insurance industry have price-to-sales ratios (or "P/S") below 1x, you may consider American Coastal Insurance as a stock probably not worth researching with its 2.5x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does American Coastal Insurance's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, American Coastal Insurance's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is American Coastal Insurance's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as American Coastal Insurance's is when the company's growth is on track to outshine the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 11%. The last three years don't look nice either as the company has shrunk revenue by 68% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 45% over the next year. That's shaping up to be materially higher than the 6.1% growth forecast for the broader industry.

With this information, we can see why American Coastal Insurance 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.

The Key Takeaway

American Coastal Insurance's P/S is on the rise since its shares have risen strongly. 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 American Coastal Insurance's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

It is also worth noting that we have found 1 warning sign for American Coastal Insurance that you need to take into consideration.

If you're unsure about the strength of American Coastal Insurance's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.