There wouldn't be many who think Legend Biotech Corporation's (NASDAQ:LEGN) price-to-sales (or "P/S") ratio of 9.6x is worth a mention when the median P/S for the Biotechs industry in the United States is similar at about 8.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
We check all companies for important risks. See what we found for Legend Biotech in our free report.
What Does Legend Biotech's P/S Mean For Shareholders?
Recent times haven't been great for Legend Biotech 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. However, if this isn't the case, investors might get caught out paying too much for the stock.
Keen to find out how analysts think Legend Biotech's future stacks up against the industry? In that case, our free report is a great place to start.Is There Some Revenue Growth Forecasted For Legend Biotech?
The only time you'd be comfortable seeing a P/S like Legend Biotech'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 120% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.
Turning to the outlook, the next three years should generate growth of 48% per year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 173% per year, which is noticeably more attractive.
In light of this, it's curious that Legend Biotech's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.
The Final Word
It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Given that Legend Biotech'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. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.
A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Legend Biotech with six simple checks.
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.
