Mersana Therapeutics, Inc.'s (NASDAQ:MRSN) 25% Dip In Price Shows Sentiment Is Matching Revenues

Unfortunately for some shareholders, the Mersana Therapeutics, Inc. (NASDAQ:MRSN) share price has dived 25% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 41% in that time.

After such a large drop in price, Mersana Therapeutics' price-to-sales (or "P/S") ratio of 6.5x might make it look like a buy right now compared to the Biotechs industry in the United States, where around half of the companies have P/S ratios above 11.6x and even P/S above 64x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Mersana Therapeutics

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

Recent times haven't been great for Mersana Therapeutics as its revenue has been rising slower than most other companies. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. 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 Mersana Therapeutics' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Revenue Growth Forecasted For Mersana Therapeutics?

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

Taking a look back first, we see that the company grew revenue by an impressive 18% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue growth is heading into negative territory, declining 7.1% each year over the next three years. With the industry predicted to deliver 203% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Mersana Therapeutics' P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Mersana Therapeutics' P/S?

The southerly movements of Mersana Therapeutics' shares means its P/S is now sitting at a pretty low level. 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.

As we suspected, our examination of Mersana Therapeutics' analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Mersana Therapeutics has 3 warning signs we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com