Microbix Biosystems Inc. (TSE:MBX) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

Microbix Biosystems Inc. (TSE:MBX) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 6.4% isn't as impressive.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Microbix Biosystems' P/S ratio of 2.2x, since the median price-to-sales (or "P/S") ratio for the Biotechs industry in Canada is also close to 2.7x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Microbix Biosystems

How Microbix Biosystems Has Been Performing

With revenue growth that's superior to most other companies of late, Microbix Biosystems has been doing relatively well. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Microbix Biosystems.

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, Microbix Biosystems would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 54%. The strong recent performance means it was also able to grow revenue by 37% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 22% each year as estimated by the only analyst watching the company. With the industry predicted to deliver 115% growth per year, the company is positioned for a weaker revenue result.

With this information, we find it interesting that Microbix Biosystems is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Microbix Biosystems' P/S Mean For Investors?

Microbix Biosystems appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Given that Microbix Biosystems' 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. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for Microbix Biosystems you should be aware of.

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.