Some Shareholders Feeling Restless Over Rhythm Pharmaceuticals, Inc.'s (NASDAQ:RYTM) P/S Ratio
With a price-to-sales (or "P/S") ratio of 28.2x Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM) may be sending very bearish signals at the moment, given that almost half of all the Biotechs companies in the United States have P/S ratios under 11.4x and even P/S lower than 4x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.
Check out our latest analysis for Rhythm Pharmaceuticals
What Does Rhythm Pharmaceuticals' P/S Mean For Shareholders?
Rhythm Pharmaceuticals 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. If not, then existing shareholders might be a little nervous about the viability of the share price.
Want the full picture on analyst estimates for the company? Then our free report on Rhythm Pharmaceuticals will help you uncover what's on the horizon.
How Is Rhythm Pharmaceuticals' Revenue Growth Trending?
In order to justify its P/S ratio, Rhythm Pharmaceuticals would need to produce outstanding growth that's well in excess of the industry.
Retrospectively, the last year delivered an explosive gain to the company's top line. In spite of this unbelievable short-term growth, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.
Turning to the outlook, the next three years should generate growth of 102% per annum as estimated by the nine analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 109% per annum, which is not materially different.
In light of this, it's curious that Rhythm Pharmaceuticals' P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.
The Key Takeaway
Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Given Rhythm Pharmaceuticals' future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
It is also worth noting that we have found 2 warning signs for Rhythm Pharmaceuticals that you need to take into consideration.
If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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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