Getting In Cheap On Zai Lab Limited (NASDAQ:ZLAB) Is Unlikely

With a median price-to-sales (or "P/S") ratio of close to 10.5x in the Biotechs industry in the United States, you could be forgiven for feeling indifferent about Zai Lab Limited's (NASDAQ:ZLAB) P/S ratio of 8.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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How Has Zai Lab Performed Recently?

Recent times haven't been great for Zai Lab as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Zai Lab's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company grew revenue by an impressive 33% last year. The latest three year period has also seen an excellent 135% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 51% each year over the next three years. That's shaping up to be materially lower than the 128% per year growth forecast for the broader industry.

With this in mind, we find it intriguing that Zai Lab's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Zai Lab's P/S Mean For Investors?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Given that Zai Lab's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

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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.