Neuren Pharmaceuticals Limited's (ASX:NEU) 51% Jump Shows Its Popularity With Investors

Despite an already strong run, Neuren Pharmaceuticals Limited (ASX:NEU) shares have been powering on, with a gain of 51% in the last thirty days. The last month tops off a massive increase of 198% in the last year.

Following the firm bounce in price, Neuren Pharmaceuticals may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 35.9x, since almost half of all companies in the Pharmaceuticals industry in Australia have P/S ratios under 8.2x and even P/S lower than 1.6x 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 Neuren Pharmaceuticals

What Does Neuren Pharmaceuticals' P/S Mean For Shareholders?

Recent times have been advantageous for Neuren Pharmaceuticals as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Neuren Pharmaceuticals.

What Are Revenue Growth Metrics Telling Us About The High P/S?

Neuren Pharmaceuticals' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months. The amazing performance means it was also able to deliver huge revenue growth over the last three years. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 146% as estimated by the four analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 95%, which is noticeably less attractive.

With this information, we can see why Neuren Pharmaceuticals is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

The strong share price surge has lead to Neuren Pharmaceuticals' P/S soaring as well. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Neuren Pharmaceuticals 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. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Neuren Pharmaceuticals with six simple checks.

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.