Cara Therapeutics, Inc.'s (NASDAQ:CARA) P/S Is On The Mark
You may think that with a price-to-sales (or "P/S") ratio of 4.4x Cara Therapeutics, Inc. (NASDAQ:CARA) is a stock to potentially avoid, seeing as almost half of all the Pharmaceuticals companies in the United States have P/S ratios under 3.1x and even P/S lower than 0.9x 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 elevated P/S.
View our latest analysis for Cara Therapeutics
What Does Cara Therapeutics' Recent Performance Look Like?
Cara Therapeutics certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Cara Therapeutics.
Do Revenue Forecasts Match The High P/S Ratio?
Cara Therapeutics' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.
Taking a look back first, we see that the company grew revenue by an impressive 67% last year. The latest three year period has also seen an excellent 83% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.
Turning to the outlook, the next three years should generate growth of 51% per year as estimated by the eight analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 42% per annum, which is noticeably less attractive.
With this in mind, it's not hard to understand why Cara Therapeutics' P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.
We've established that Cara Therapeutics maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Pharmaceuticals 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.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Cara Therapeutics, and understanding these should be part of your investment process.
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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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