Investors Don't See Light At End Of Heron Therapeutics, Inc.'s (NASDAQ:HRTX) Tunnel
Heron Therapeutics, Inc.'s (NASDAQ:HRTX) price-to-sales (or "P/S") ratio of 2.6x might make it look like a strong buy right now compared to the Biotechs industry in the United States, where around half of the companies have P/S ratios above 11.5x and even P/S above 53x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.
View our latest analysis for Heron Therapeutics
How Heron Therapeutics Has Been Performing
With revenue growth that's inferior to most other companies of late, Heron Therapeutics has been relatively sluggish. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. 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 Heron Therapeutics' future stacks up against the industry? In that case, our free report is a great place to start.
Is There Any Revenue Growth Forecasted For Heron Therapeutics?
The only time you'd be truly comfortable seeing a P/S as depressed as Heron Therapeutics' is when the company's growth is on track to lag the industry decidedly.
If we review the last year of revenue growth, the company posted a terrific increase of 25%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 26% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.
Turning to the outlook, the next three years should generate growth of 29% per annum as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 104% each year growth forecast for the broader industry.
With this in consideration, its clear as to why Heron Therapeutics' P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Bottom Line On Heron Therapeutics' P/S
We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As expected, our analysis of Heron Therapeutics' analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor 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.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Heron Therapeutics (at least 2 which are concerning), and understanding these should be part of your investment process.
If these risks are making you reconsider your opinion on Heron Therapeutics, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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