Heidelberg Pharma AG's (ETR:HPHA) Price In Tune With Revenues

Heidelberg Pharma AG's (ETR:HPHA) price-to-sales (or "P/S") ratio of 15x might make it look like a strong sell right now compared to the Biotechs industry in Germany, where around half of the companies have P/S ratios below 4.8x and even P/S below 0.7x 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.

View our latest analysis for Heidelberg Pharma

What Does Heidelberg Pharma's Recent Performance Look Like?

Heidelberg Pharma could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Keen to find out how analysts think Heidelberg Pharma's future stacks up against the industry? In that case, our free report is a great place to start.

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

In order to justify its P/S ratio, Heidelberg Pharma would need to produce outstanding growth that's well 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 42%. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue growth will be highly resilient over the next year growing by 23%. That would be an excellent outcome when the industry is expected to decline by 2.7%.

With this in consideration, we understand why Heidelberg Pharma's P/S is a cut above its industry peers. Right now, investors are willing to pay more for a stock that is shaping up to buck the trend of the broader industry going backwards.

What We Can Learn From Heidelberg Pharma's 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 we anticipated, our review of Heidelberg Pharma's analyst forecasts shows that the company's better revenue forecast compared to a turbulent industry is a significant contributor to its high price-to-sales ratio. Outperforming the industry in this manner looks to have provided investors with a bit of confidence that the future will be bright, bolstering the P/S. Our only concern is whether its revenue trajectory can keep outperforming under these tough industry conditions. Although, if the company's prospects don't change they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Heidelberg Pharma, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Heidelberg Pharma, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.