Getting In Cheap On Eton Pharmaceuticals, Inc. (NASDAQ:ETON) Might Be Difficult
With a price-to-sales (or "P/S") ratio of 4.2x Eton Pharmaceuticals, Inc. (NASDAQ:ETON) may be sending bearish signals at the moment, given that almost half of all Pharmaceuticals companies in the United States have P/S ratios under 3.2x and even P/S lower than 0.9x are not unusual. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
Check out our latest analysis for Eton Pharmaceuticals
What Does Eton Pharmaceuticals' Recent Performance Look Like?
Eton Pharmaceuticals 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 might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. 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 Eton Pharmaceuticals.
How Is Eton Pharmaceuticals' Revenue Growth Trending?
In order to justify its P/S ratio, Eton Pharmaceuticals would need to produce impressive growth in excess of 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 2.7%. The latest three year period has seen an incredible overall rise in revenue, a stark contrast to the last 12 months. So while the company has done a great job in the past, it's somewhat concerning to see revenue growth decline so harshly.
Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 38% over the next year. That's shaping up to be materially higher than the 5.8% growth forecast for the broader industry.
With this in mind, it's not hard to understand why Eton Pharmaceuticals' 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 Key Takeaway
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.
Our look into Eton Pharmaceuticals shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.
And what about other risks? Every company has them, and we've spotted 2 warning signs for Eton Pharmaceuticals you should know about.
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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