Cara Therapeutics, Inc. (NASDAQ:CARA) shareholders that were waiting for something to happen have been dealt a blow with a 68% share price drop in the last month. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 92% loss during that time.

Following the heavy fall in price, Cara Therapeutics may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.8x, since almost half of all companies in the Pharmaceuticals industry in the United States have P/S ratios greater than 2.7x and even P/S higher than 13x 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 limited.

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

While the industry has experienced revenue growth lately, Cara Therapeutics' revenue has gone into reverse gear, which is not great. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. 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 Cara Therapeutics' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Cara Therapeutics' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Cara Therapeutics' is when the company's growth is on track to lag the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 61%. This means it has also seen a slide in revenue over the longer-term as revenue is down 87% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 14% each year as estimated by the five analysts watching the company. Meanwhile, the broader industry is forecast to expand by 17% per annum, which paints a poor picture.

With this in consideration, we find it intriguing that Cara Therapeutics' P/S is closely matching its industry peers. 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.

What Does Cara Therapeutics' P/S Mean For Investors?

Cara Therapeutics' recently weak share price has pulled its P/S back below other Pharmaceuticals companies. 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.

As we suspected, our examination of Cara Therapeutics' analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, Cara Therapeutics' poor outlook justifies its low P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Cara Therapeutics (1 is concerning) you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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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