Aroa Biosurgery Limited's (ASX:ARX) Revenues Are Not Doing Enough For Some Investors

With a price-to-sales (or "P/S") ratio of 4.3x Aroa Biosurgery Limited (ASX:ARX) may be sending very bullish signals at the moment, given that almost half of all the Biotechs companies in Australia have P/S ratios greater than 9.9x and even P/S higher than 25x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

View our latest analysis for Aroa Biosurgery

How Aroa Biosurgery Has Been Performing

Recent times have been advantageous for Aroa Biosurgery as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Aroa Biosurgery will help you uncover what's on the horizon.

Is There Any Revenue Growth Forecasted For Aroa Biosurgery?

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

If we review the last year of revenue growth, the company posted a terrific increase of 60%. The latest three year period has also seen an excellent 153% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 23% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 30% per year, which is noticeably more attractive.

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 Bottom Line On Aroa Biosurgery's P/S

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.

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. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. It's hard to see the share price rising strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. 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.