Getting In Cheap On Avacta Group Plc (LON:AVCT) Is Unlikely

Avacta Group Plc's (LON:AVCT) price-to-sales (or "P/S") ratio of 30.5x might make it look like a strong sell right now compared to the Biotechs industry in the United Kingdom, where around half of the companies have P/S ratios below 15.9x and even P/S below 7x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Avacta Group

What Does Avacta Group's Recent Performance Look Like?

Recent times have been advantageous for Avacta Group as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Avacta Group's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Avacta Group's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 228% gain to the company's top line. The latest three year period has also seen an excellent 148% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 34% per year during the coming three years according to the two analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 38% per year, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Avacta Group's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

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 concluded that Avacta Group currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Avacta Group (at least 1 which makes us a bit uncomfortable), and understanding them should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.