Take Care Before Jumping Onto Aroa Biosurgery Limited (ASX:ARX) Even Though It's 29% Cheaper

Aroa Biosurgery Limited (ASX:ARX) shareholders won't be pleased to see that the share price has had a very rough month, dropping 29% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 49% in that time.

Following the heavy fall in price, Aroa Biosurgery may be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 2.4x, since almost half of all companies in the Biotechs industry in Australia have P/S ratios greater than 10.9x and even P/S higher than 23x 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

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

Recent times haven't been great for Aroa Biosurgery 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.

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.

Retrospectively, the last year delivered a decent 9.0% gain to the company's revenues. Pleasingly, revenue has also lifted 209% 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.

Turning to the outlook, the next three years should generate growth of 24% per year as estimated by the five analysts watching the company. With the industry predicted to deliver 25% growth each year, the company is positioned for a comparable revenue result.

In light of this, it's peculiar that Aroa Biosurgery's P/S sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

The Key Takeaway

Having almost fallen off a cliff, Aroa Biosurgery's share price has pulled its P/S way down as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've seen that Aroa Biosurgery currently trades on a lower than expected P/S since its forecast growth is in line with the wider industry. Despite average revenue growth estimates, there could be some unobserved threats keeping the P/S low. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

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 Aroa Biosurgery with six simple checks.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.