Denali Therapeutics Inc.'s (NASDAQ:DNLI) Price Is Right But Growth Is Lacking After Shares Rocket 25%

Those holding Denali Therapeutics Inc. (NASDAQ:DNLI) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 5.7% in the last twelve months.

In spite of the firm bounce in price, Denali Therapeutics may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 9x, since almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 15x and even P/S higher than 69x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for Denali Therapeutics

What Does Denali Therapeutics' P/S Mean For Shareholders?

Denali Therapeutics' revenue growth of late has been pretty similar to most other companies. One possibility is that the P/S ratio is low because investors think this modest revenue performance may begin to slide. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.

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

Is There Any Revenue Growth Forecasted For Denali Therapeutics?

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

If we review the last year of revenue growth, the company posted a terrific increase of 205%. However, this wasn't enough as the latest three year period has seen the company endure a nasty 1.5% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to slump, contracting by 12% each year during the coming three years according to the analysts following the company. Meanwhile, the broader industry is forecast to expand by 145% per annum, which paints a poor picture.

In light of this, it's understandable that Denali Therapeutics' P/S would sit below the majority of other companies. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Denali Therapeutics' stock price has surged recently, but its but its P/S still remains modest. 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.

As we suspected, our examination of Denali Therapeutics' analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 3 warning signs for Denali Therapeutics you should be aware of.

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.