Mersana Therapeutics, Inc. (NASDAQ:MRSN) Shares Fly 29% But Investors Aren't Buying For Growth

Mersana Therapeutics, Inc. (NASDAQ:MRSN) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 61% in the last year.

In spite of the firm bounce in price, Mersana Therapeutics may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 8.4x, since almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 11.8x and even P/S higher than 68x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Mersana Therapeutics

How Mersana Therapeutics Has Been Performing

Mersana Therapeutics hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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

How Is Mersana Therapeutics' Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Mersana Therapeutics' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 23% decrease to the company's top line. The latest three year period has seen an incredible overall rise in revenue, a stark contrast to the last 12 months. So while the company has done a great job in the past, it's somewhat concerning to see revenue growth decline so harshly.

Shifting to the future, estimates from the ten analysts covering the company suggest revenue should grow by 7.5% each year over the next three years. That's shaping up to be materially lower than the 146% each year growth forecast for the broader industry.

With this information, we can see why Mersana Therapeutics is trading at a P/S lower than the industry. 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 Mersana Therapeutics' P/S

Despite Mersana Therapeutics' share price climbing recently, its P/S still lags most other companies. 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 expected, our analysis of Mersana 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 2 warning signs for Mersana Therapeutics that we have uncovered.

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.