Heron Therapeutics, Inc. (NASDAQ:HRTX) Surges 27% Yet Its Low P/S Is No Reason For Excitement

Heron Therapeutics, Inc. (NASDAQ:HRTX) shares have continued their recent momentum with a 27% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 3.4% isn't as impressive.

Although its price has surged higher, Heron Therapeutics' price-to-sales (or "P/S") ratio of 3.3x might still make it look like a strong buy right now compared to the wider Biotechs industry in the United States, where around half of the companies have P/S ratios above 13.9x and even P/S above 61x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

View our latest analysis for Heron Therapeutics

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

Heron Therapeutics could be doing better as it's been growing revenue less than most other companies lately. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Heron Therapeutics.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

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

Retrospectively, the last year delivered an exceptional 25% gain to the company's top line. Revenue has also lifted 19% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 18% per annum over the next three years. That's shaping up to be materially lower than the 250% per annum growth forecast for the broader industry.

With this in consideration, its clear as to why Heron Therapeutics' P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Heron Therapeutics' P/S

Even after such a strong price move, Heron Therapeutics' P/S still trails the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As expected, our analysis of Heron Therapeutics' analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor 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. The company will need a change of fortune to justify the P/S rising higher in the future.

It is also worth noting that we have found 4 warning signs for Heron Therapeutics (2 don't sit too well with us!) 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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