Pinning Down Neuren Pharmaceuticals Limited's (ASX:NEU) P/S Is Difficult Right Now

Neuren Pharmaceuticals Limited's (ASX:NEU) price-to-sales (or "P/S") ratio of 8.6x might make it look like a strong sell right now compared to the Pharmaceuticals industry in Australia, where around half of the companies have P/S ratios below 4.8x and even P/S below 1.5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Neuren Pharmaceuticals

What Does Neuren Pharmaceuticals' Recent Performance Look Like?

Recent times have been advantageous for Neuren Pharmaceuticals as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. 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 Neuren Pharmaceuticals.

Is There Enough Revenue Growth Forecasted For Neuren Pharmaceuticals?

The only time you'd be truly comfortable seeing a P/S as steep as Neuren Pharmaceuticals' is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months. Spectacularly, three year revenue growth has also set the world alight, thanks to the last 12 months of incredible growth. 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 0.1% per year as estimated by the six analysts watching the company. Meanwhile, the broader industry is forecast to expand by 14% per annum, which paints a poor picture.

With this information, we find it concerning that Neuren Pharmaceuticals is trading at a P/S higher than the industry. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh heavily on the share price eventually.

What We Can Learn From Neuren Pharmaceuticals' P/S?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

For a company with revenues that are set to decline in the context of a growing industry, Neuren Pharmaceuticals' P/S is much higher than we would've anticipated. Right now we aren't comfortable with the high P/S as the predicted future revenue decline likely to impact the positive sentiment that's propping up the P/S. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Neuren Pharmaceuticals that you should be aware of.

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.