Risks To Shareholder Returns Are Elevated At These Prices For Nykode Therapeutics AS (OB:NYKD)

You may think that with a price-to-sales (or "P/S") ratio of 37.6x Nykode Therapeutics AS (OB:NYKD) is a stock to potentially avoid, seeing as almost half of all the Biotechs companies in Norway have P/S ratios under 25.3x and even P/S lower than 6x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Nykode Therapeutics

How Nykode Therapeutics Has Been Performing

Nykode Therapeutics has been struggling lately as its revenue has declined faster than most other companies. One possibility is that the P/S ratio is high because investors think the company will turn things around completely and accelerate past most others in the industry. If not, then existing shareholders may be very 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 Nykode Therapeutics.

How Is Nykode Therapeutics' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Nykode Therapeutics' is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 61% decrease to the company's top line. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, despite the drawbacks experienced in the last 12 months. Therefore, it's fair to say the revenue growth recently has been superb for the company, but investors will want to ask why it is now in decline.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 13% per annum over the next three years. That's shaping up to be materially lower than the 73% each year growth forecast for the broader industry.

With this information, we find it concerning that Nykode Therapeutics is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Nykode Therapeutics' P/S?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Nykode Therapeutics, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Nykode Therapeutics (1 is significant!) that you should be aware of before investing here.

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.