Arrowhead Pharmaceuticals, Inc. (NASDAQ:ARWR) shareholders would be excited to see that the share price has had a great month, posting a 36% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 14% in the last twelve months.

Following the firm bounce in price, Arrowhead Pharmaceuticals may be sending sell signals at present with a price-to-sales (or "P/S") ratio of 16.4x, when you consider almost half of the companies in the Biotechs industry in the United States have P/S ratios under 12.6x and even P/S lower than 4x 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 elevated P/S.

Check out our latest analysis for Arrowhead Pharmaceuticals

How Arrowhead Pharmaceuticals Has Been Performing

Arrowhead Pharmaceuticals could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. However, if this isn't the case, investors might get caught out paying too much for the stock.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.0%. Still, the latest three year period has seen an excellent 174% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 6.5% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 240% each year, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Arrowhead Pharmaceuticals' P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.

What We Can Learn From Arrowhead Pharmaceuticals' P/S?

The large bounce in Arrowhead Pharmaceuticals' shares has lifted the company's P/S handsomely. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 7 warning signs for Arrowhead Pharmaceuticals that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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