Unfortunately for some shareholders, the LAVA Therapeutics N.V. (NASDAQ:LVTX) share price has dived 26% in the last thirty days, prolonging recent pain. The recent drop has obliterated the annual return, with the share price now down 4.9% over that longer period.

Since its price has dipped substantially, LAVA Therapeutics may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 4.1x, considering almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 11.6x and even P/S higher than 64x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

What Does LAVA Therapeutics' Recent Performance Look Like?

LAVA Therapeutics could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. 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 LAVA Therapeutics' future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The Low P/S Ratio?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 36%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 179% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Looking ahead now, revenue is anticipated to slump, contracting by 65% each year during the coming three years according to the four analysts following the company. That's not great when the rest of the industry is expected to grow by 203% per year.

With this information, we are not surprised that LAVA Therapeutics is trading at a P/S lower than the industry. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. 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 LAVA Therapeutics' P/S Mean For Investors?

Shares in LAVA Therapeutics have plummeted and its P/S has followed suit. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that LAVA Therapeutics' P/S is on the lower end of the spectrum. As other companies in the industry are forecasting revenue growth, LAVA 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.

And what about other risks? Every company has them, and we've spotted 4 warning signs for LAVA Therapeutics (of which 1 is potentially serious!) you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com