Aadi Bioscience, Inc. (NASDAQ:AADI) shares have continued their recent momentum with a 53% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 72%.

In spite of the firm bounce in price, Aadi Bioscience may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 3.3x, considering almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 9.7x and even P/S higher than 61x 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.

How Aadi Bioscience Has Been Performing

Recent times haven't been great for Aadi Bioscience as its revenue has been rising slower than most other companies. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

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 Aadi Bioscience's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 7.8%. Pleasingly, revenue has also lifted 76% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 36% each year over the next three years. With the industry predicted to deliver 114% growth per year, the company is positioned for a weaker revenue result.

With this information, we can see why Aadi Bioscience is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Even after such a strong price move, Aadi Bioscience's P/S still trails the rest of the industry. 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.

We've established that Aadi Bioscience maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. The company will need a change of fortune to justify the P/S rising higher in the future.

Before you take the next step, you should know about the 3 warning signs for Aadi Bioscience that we have uncovered.

If these risks are making you reconsider your opinion on Aadi Bioscience, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.