With a price-to-sales (or "P/S") ratio of 2.3x Intercept Pharmaceuticals, Inc. (NASDAQ:ICPT) may be sending very bullish signals at the moment, given that almost half of all the Biotechs companies in the United States have P/S ratios greater than 11.5x and even P/S higher than 53x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.
What Does Intercept Pharmaceuticals' P/S Mean For Shareholders?
Recent times haven't been great for Intercept Pharmaceuticals 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.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Intercept Pharmaceuticals.
Is There Any Revenue Growth Forecasted For Intercept Pharmaceuticals?
The only time you'd be truly comfortable seeing a P/S as depressed as Intercept Pharmaceuticals' is when the company's growth is on track to lag the industry decidedly.
Taking a look back first, we see that the company managed to grow revenues by a handy 12% last year. The latest three year period has also seen a 8.1% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.
Looking ahead now, revenue is anticipated to climb by 25% per year during the coming three years according to the analysts following the company. With the industry predicted to deliver 104% growth per annum, the company is positioned for a weaker revenue result.
With this in consideration, its clear as to why Intercept Pharmaceuticals' P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Final Word
Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Intercept Pharmaceuticals maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. The company will need a change of fortune to justify the P/S rising higher in the future.
You always need to take note of risks, for example - Intercept Pharmaceuticals has 2 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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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.
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