Cumberland Pharmaceuticals Inc. (NASDAQ:CPIX) Held Back By Insufficient Growth Even After Shares Climb 117%

Despite an already strong run, Cumberland Pharmaceuticals Inc. (NASDAQ:CPIX) shares have been powering on, with a gain of 117% in the last thirty days. The annual gain comes to 129% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, Cumberland Pharmaceuticals' price-to-sales (or "P/S") ratio of 1.9x might still make it look like a buy right now compared to the Pharmaceuticals industry in the United States, where around half of the companies have P/S ratios above 2.9x and even P/S above 12x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for Cumberland Pharmaceuticals

How Has Cumberland Pharmaceuticals Performed Recently?

For example, consider that Cumberland Pharmaceuticals' financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. Those who are bullish on Cumberland Pharmaceuticals will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Cumberland Pharmaceuticals' earnings, revenue and cash flow.

How Is Cumberland Pharmaceuticals' Revenue Growth Trending?

Cumberland Pharmaceuticals' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a frustrating 6.5% decrease to the company's top line. As a result, revenue from three years ago have also fallen 3.0% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 17% shows it's an unpleasant look.

With this information, we are not surprised that Cumberland Pharmaceuticals is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

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

The latest share price surge wasn't enough to lift Cumberland Pharmaceuticals' P/S close to the industry median. 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.

Our examination of Cumberland Pharmaceuticals confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Having said that, be aware Cumberland Pharmaceuticals is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.

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.