Denali Therapeutics Inc.'s (NASDAQ:DNLI) price-to-sales (or "P/S") ratio of 7.9x might make it look like a buy right now compared to the Biotechs industry in the United States, where around half of the companies have P/S ratios above 13.2x and even P/S above 66x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

How Denali Therapeutics Has Been Performing

Recent revenue growth for Denali Therapeutics has been in line with the industry. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

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

There's an inherent assumption that a company should underperform the industry for P/S ratios like Denali Therapeutics' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 205% last year. Still, revenue has fallen 1.5% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 8.8% per year as estimated by the analysts watching the company. Meanwhile, the broader industry is forecast to expand by 166% per year, which paints a poor picture.

With this in consideration, we find it intriguing that Denali Therapeutics' P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

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

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Denali Therapeutics' P/S is on the lower end of the spectrum. As other companies in the industry are forecasting revenue growth, Denali Therapeutics' poor outlook justifies its low P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 4 warning signs for Denali Therapeutics 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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