Aroa Biosurgery Limited (ASX:ARX) Held Back By Insufficient Growth Even After Shares Climb 26%

Aroa Biosurgery Limited (ASX:ARX) shares have continued their recent momentum with a 26% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 2.9% isn't as attractive.

Even after such a large jump in price, Aroa Biosurgery may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 3.6x, since almost half of all companies in the Biotechs industry in Australia have P/S ratios greater than 10.7x and even P/S higher than 36x are not unusual. 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.

See our latest analysis for Aroa Biosurgery

What Does Aroa Biosurgery's P/S Mean For Shareholders?

Aroa Biosurgery's revenue growth of late has been pretty similar to most other companies. One possibility is that the P/S ratio is low because investors think this modest revenue performance may begin to slide. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.

Keen to find out how analysts think Aroa Biosurgery's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Aroa Biosurgery's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as depressed as Aroa Biosurgery's is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered an exceptional 16% gain to the company's top line. Pleasingly, revenue has also lifted 146% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 26% per annum as estimated by the five analysts watching the company. With the industry predicted to deliver 35% growth each year, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Aroa Biosurgery's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Aroa Biosurgery's recent share price jump still sees fails to bring its P/S alongside the industry median. 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.

As expected, our analysis of Aroa Biosurgery's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Aroa Biosurgery with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.