There's Reason For Concern Over Pharma Mar, S.A.'s (BME:PHM) Massive 27% Price Jump

The Pharma Mar, S.A. (BME:PHM) share price has done very well over the last month, posting an excellent gain of 27%. The last month tops off a massive increase of 172% in the last year.

Although its price has surged higher, it's still not a stretch to say that Pharma Mar's price-to-sales (or "P/S") ratio of 9.9x right now seems quite "middle-of-the-road" compared to the Biotechs industry in Spain, where the median P/S ratio is around 8.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Pharma Mar

What Does Pharma Mar's P/S Mean For Shareholders?

Pharma Mar hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Pharma Mar will help you uncover what's on the horizon.

Is There Some Revenue Growth Forecasted For Pharma Mar?

Pharma Mar's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 11% overall from three years ago. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 29% per year as estimated by the five analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 64% per annum, which is noticeably more attractive.

In light of this, it's curious that Pharma Mar's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What Does Pharma Mar's P/S Mean For Investors?

Its shares have lifted substantially and now Pharma Mar's P/S is back within range of the industry median. 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.

Given that Pharma Mar's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Plus, you should also learn about these 3 warning signs we've spotted with Pharma Mar (including 1 which is concerning).

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.