Shares of Prometheus Biosciences (RXDX) Fall -6.0%. Here's What You Need to Know.

Biotechnology company Prometheus Biosciences fell -6.0% on Friday to $110.20 per share. RXDX is now -12.09% below its average analyst target price of $125.36, which implies there is more upside for the stock. As such, the average analyst rates it at strong buy. Over the last year, Prometheus Biosciences shares have outstripped the S&P 500 by 246.7%, with a price change of 230.9%.

Prometheus Biosciences, Inc., a biopharmaceutical company, engages in the discovery, development, and commercialization of novel therapeutics and companion diagnostics products for the treatment of inflammatory bowel diseases (IBD). 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.

Prometheus Biosciences does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (Eps) values of $-3.66 and $-2.78. We can see that RXDX has a forward P/E ratio of -30.1 and a trailing P/E ratio of -39.7. As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US healthcare companies is 13.21, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

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, Prometheus Biosciences's operating margins have averaged -inf% and displayed a mean growth rate of -25.1%. These numbers show that the company may not be on the best track.

When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Prometheus Biosciences was $-64,641,000.00 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 RXDX's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $-29,880,000.00 and they've been growing at an average rate of -132.7%.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Prometheus biosciences's P/B ratio is 19.8 -- in other words, the market value of the company exceeds its book value by a factor of more than 19, 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.

Since it has a negative P/E ratio, an elevated P/B ratio, and an irregular stream of negative cash flows with a downwards trend, Prometheus Biosciences is likely overvalued at today's prices. The company has poor growth indicators because of no published PEG ratio and weak operating margins with a negative growth rate. We hope you enjoyed this overview of RXDX's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.