With a price-to-sales (or "P/S") ratio of 15.2x Arrowhead Pharmaceuticals, Inc. (NASDAQ:ARWR) may be sending bearish signals at the moment, given that almost half of all Biotechs companies in the United States have P/S ratios under 12.6x and even P/S lower than 4x are not unusual. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How Arrowhead Pharmaceuticals Has Been Performing

While the industry has experienced revenue growth lately, Arrowhead Pharmaceuticals' revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Arrowhead Pharmaceuticals?

Arrowhead Pharmaceuticals' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 35%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 128% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to climb by 21% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 162% each year, which is noticeably more attractive.

In light of this, it's alarming that Arrowhead 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Arrowhead Pharmaceuticals, this doesn't appear to be impacting the P/S in the slightest. 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.

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

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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