Why Investors Shouldn't Be Surprised By Aroa Biosurgery Limited's (ASX:ARX) 26% Share Price Plunge

Aroa Biosurgery Limited (ASX:ARX) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Since its price has dipped substantially, Aroa Biosurgery may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 2.8x, considering almost half of all companies in the Biotechs industry in Australia have P/S ratios greater than 11.4x and even P/S higher than 30x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

Check out our latest analysis for Aroa Biosurgery

How Aroa Biosurgery Has Been Performing

Recent revenue growth for Aroa Biosurgery has been in line with the industry. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. Those who are bullish on Aroa Biosurgery will be hoping that this isn't the case.

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.

Do Revenue Forecasts Match The Low P/S Ratio?

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.

Taking a look back first, we see that the company grew revenue by an impressive 16% last year. The strong recent performance means it was also able to grow revenue by 146% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 25% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 68% per annum, which is noticeably more attractive.

With this information, we can see why Aroa Biosurgery 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.

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

Having almost fallen off a cliff, Aroa Biosurgery's share price has pulled its P/S way down as well. 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 Aroa Biosurgery maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Aroa Biosurgery with six simple checks will allow you to discover any risks that could be an issue.

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.