Pinning Down Arrowhead Pharmaceuticals, Inc.'s (NASDAQ:ARWR) P/S Is Difficult Right Now

With a median price-to-sales (or "P/S") ratio of close to 12.1x in the Biotechs industry in the United States, you could be forgiven for feeling indifferent about Arrowhead Pharmaceuticals, Inc.'s (NASDAQ:ARWR) P/S ratio of 13.5x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Arrowhead Pharmaceuticals

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

While the industry has experienced revenue growth lately, Arrowhead Pharmaceuticals' revenue has gone into reverse gear, which is not great. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

Is There Some Revenue Growth Forecasted For Arrowhead Pharmaceuticals?

The only time you'd be comfortable seeing a P/S like Arrowhead Pharmaceuticals' is when the company's growth is tracking the industry closely.

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 1.0%. Still, the latest three year period has seen an excellent 174% overall rise in revenue, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 6.8% each year as estimated by the analysts watching the company. With the industry predicted to deliver 240% growth per year, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Arrowhead Pharmaceuticals' P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Given that Arrowhead Pharmaceuticals' 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 8 warning signs for Arrowhead Pharmaceuticals (2 are a bit concerning!) that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.