Idorsia Ltd (VTX:IDIA) Stock Catapults 38% Though Its Price And Business Still Lag The Industry

Idorsia Ltd (VTX:IDIA) shares have continued their recent momentum with a 38% gain in the last month alone. The annual gain comes to 120% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, given close to half the companies in Switzerland's Biotechs industry have price-to-sales ratios (or "P/S") above 8.8x, you may still consider Idorsia as a highly attractive investment with its 3.5x P/S ratio. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for Idorsia

What Does Idorsia's P/S Mean For Shareholders?

Idorsia certainly has been doing a good job lately as it's been growing revenue more than most other companies. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

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

In order to justify its P/S ratio, Idorsia would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered an exceptional 70% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 9.8% during the coming year according to the lone analyst following the company. With the industry predicted to deliver 289% growth, the company is positioned for a weaker revenue result.

With this information, we can see why Idorsia 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.

The Final Word

Even after such a strong price move, Idorsia's P/S still trails the rest of the industry. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As expected, our analysis of Idorsia's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 5 warning signs for Idorsia (3 are potentially serious!) that you need to take into consideration.

If you're unsure about the strength of Idorsia's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.