CareDx, Inc's (NASDAQ:CDNA) Shares Lagging The Industry But So Is The Business
With a price-to-sales (or "P/S") ratio of 1.6x CareDx, Inc (NASDAQ:CDNA) may be sending very bullish signals at the moment, given that almost half of all the Biotechs companies in the United States have P/S ratios greater than 11.8x and even P/S higher than 53x are not unusual. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.
See our latest analysis for CareDx
How Has CareDx Performed Recently?
Recent times haven't been great for CareDx as its revenue has been rising slower than most other companies. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.
Keen to find out how analysts think CareDx's future stacks up against the industry? In that case, our free report is a great place to start.
Do Revenue Forecasts Match The Low P/S Ratio?
In order to justify its P/S ratio, CareDx would need to produce anemic growth that's substantially trailing the industry.
Retrospectively, the last year delivered a decent 8.6% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 153% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 3.2% each year as estimated by the seven analysts watching the company. With the industry predicted to deliver 95% growth per annum, that's a disappointing outcome.
With this in consideration, we find it intriguing that CareDx's P/S is closely matching its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.
What We Can Learn From CareDx's P/S?
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.
As we suspected, our examination of CareDx's analyst forecasts revealed that its outlook for shrinking revenue 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Having said that, be aware CareDx is showing 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored.
Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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.
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