Entrada Therapeutics, Inc.'s (NASDAQ:TRDA) Shares Bounce 32% But Its Business Still Trails The Industry

Entrada Therapeutics, Inc. (NASDAQ:TRDA) shares have had a really impressive month, gaining 32% after a shaky period beforehand. But the last month did very little to improve the 57% share price decline over the last year.

In spite of the firm bounce in price, Entrada Therapeutics may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 3x, considering almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 10.4x and even P/S higher than 88x 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 reduced P/S.

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

While the industry has experienced revenue growth lately, Entrada Therapeutics' revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

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 Entrada Therapeutics' is when the company's growth is on track to lag the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 67%. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Looking ahead now, revenue is anticipated to slump, contracting by 33% each year during the coming three years according to the five analysts following the company. With the industry predicted to deliver 127% growth per year, that's a disappointing outcome.

With this information, we are not surprised that Entrada Therapeutics is trading at a P/S lower than the industry. 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.

The Bottom Line On Entrada Therapeutics' P/S

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

As we suspected, our examination of Entrada Therapeutics' analyst forecasts revealed that its outlook for shrinking revenue is contributing 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. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Entrada Therapeutics (of which 1 is a bit concerning!) you should know about.

If these risks are making you reconsider your opinion on Entrada Therapeutics, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.