Subdued Growth No Barrier To Rhythm Pharmaceuticals, Inc.'s (NASDAQ:RYTM) Price

You may think that with a price-to-sales (or "P/S") ratio of 29.8x Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM) is a stock to avoid completely, seeing as almost half of all the Biotechs companies in the United States have P/S ratios under 10.2x and even P/S lower than 3x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Rhythm Pharmaceuticals

What Does Rhythm Pharmaceuticals' Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Rhythm Pharmaceuticals has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Rhythm Pharmaceuticals' Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Rhythm Pharmaceuticals' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 82% gain to the company's top line. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Shifting to the future, estimates from the eleven analysts covering the company suggest revenue should grow by 68% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 131% per annum, which is noticeably more attractive.

In light of this, it's alarming that Rhythm Pharmaceuticals' P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Rhythm Pharmaceuticals' P/S

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've concluded that Rhythm Pharmaceuticals currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Rhythm Pharmaceuticals with six simple checks will allow you to discover any risks that could be an issue.

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.