Heron Therapeutics, Inc.'s (NASDAQ:HRTX) Share Price Boosted 31% But Its Business Prospects Need A Lift Too

Heron Therapeutics, Inc. (NASDAQ:HRTX) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. The annual gain comes to 187% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, Heron Therapeutics' price-to-sales (or "P/S") ratio of 3.7x 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 11.2x and even P/S above 66x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Heron Therapeutics

What Does Heron Therapeutics' Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Heron Therapeutics has been relatively sluggish. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

Keen to find out how analysts think Heron Therapeutics' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Heron Therapeutics' Revenue Growth Trending?

Heron Therapeutics' P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 16% last year. The strong recent performance means it was also able to grow revenue by 59% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 20% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 210% each year, which is noticeably more attractive.

In light of this, it's understandable that Heron Therapeutics' P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

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

Shares in Heron Therapeutics have risen appreciably however, its P/S is still subdued. 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.

We've established that Heron Therapeutics maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Heron Therapeutics (of which 1 is significant!) you should know about.

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.