Standing out among the Street's worst performers today is Ascendis Pharma A/S, a biotechnology company whose shares slumped -16.4% to a price of $110.26, 40738.85% above its average analyst target price of $0.27. The average analyst rating for the stock is buy. ASND underperformed the S&P 500 index by -16.3% during today's afternoon session, but over the last year, the two have basically had the same returns, at -14.7%.
Ascendis Pharma, a biopharmaceutical company, focuses on developing therapeutics for unmet medical needs. The company is part of the healthcare sector. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the healthcare sector has an average P/E ratio of 13.21, and the average for the S&P 500 is 15.97.
To understand the company's long term profitability and market position, we can analyze its operating margins, which are the ratio of its net profits to its revenues. Over the last four years, Ascendis Pharma's operating margins have averaged -3430.3% and displayed a mean growth rate of -72.9%. These numbers show that the company may not be on the best track.
Companies have many costs that arise independently from their core business: cost of maintaining debt, rent payments, capital expenditures, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the company's free cash flow, which for Ascendis Pharma was $-441,353,000.00 as of its last annual report.
Free cash flow represents the amount of money available for reinvestment in the business or for payments to equity investors in the form of a dividend. In ASND's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $-263,826,500.00 and they've been growing at an average rate of -46.8%.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Ascendis pharma's P/B ratio is 13.6 -- in other words, the market value of the company exceeds its book value by a factor of more than 13, so the company's assets may be overvalued compared to the average P/B ratio of the Healthcare sector, which stands at 4.07 as of the third quarter of 2022.
Ascendis Pharma is likely overvalued at today's prices because it has a negative P/E ratio, an elevated P/B ratio, and an irregular stream of negative cash flows with a downwards trend. The stock has poor growth indicators because of its negative operating margins with high variability, and no published PEG ratio. We hope this preliminary analysis will encourage you to do your own research into ASND's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
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