With a median price-to-sales (or "P/S") ratio of close to 13.8x in the Biotechs industry in the United States, you could be forgiven for feeling indifferent about Insmed Incorporated's (NASDAQ:INSM) P/S ratio of 12.8x.  Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.    

NasdaqGS:INSM Price to Sales Ratio vs Industry April 3rd 2024

How Has Insmed Performed Recently?

With revenue growth that's inferior to most other companies of late, Insmed has been relatively sluggish.   One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around.  If not, then existing shareholders may be a little nervous about the viability of the share price.    

Keen to find out how analysts think Insmed's 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 P/S?  

The only time you'd be comfortable seeing a P/S like Insmed's is when the company's growth is tracking the industry closely.  

Retrospectively, the last year delivered an exceptional 24% gain to the company's top line.   The latest three year period has also seen an excellent 86% overall rise in revenue, aided by its short-term performance.  Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.  

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 39% per annum over the next three years.  With the industry predicted to deliver 164% growth per annum, the company is positioned for a weaker revenue result.

In light of this, it's curious that Insmed's P/S sits in line with the majority of other companies.  Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now.  Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.  

The Key Takeaway

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.

When you consider that Insmed's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio.  At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long.  A positive change is needed in order to justify the current price-to-sales ratio.    

We don't want to rain on the parade too much, but we did also find 4 warning signs for Insmed (1 doesn't sit too well with us!) that you need to be mindful of.  

If these risks are making you reconsider your opinion on Insmed, 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.