JW (Cayman) Therapeutics Co. Ltd (HKG:2126) Held Back By Insufficient Growth Even After Shares Climb 34%

JW (Cayman) Therapeutics Co. Ltd (HKG:2126) shareholders would be excited to see that the share price has had a great month, posting a 34% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 5.5% in the last twelve months.

In spite of the firm bounce in price, JW (Cayman) Therapeutics' price-to-sales (or "P/S") ratio of 4.8x might still make it look like a strong buy right now compared to the wider Biotechs industry in Hong Kong, where around half of the companies have P/S ratios above 11.7x and even P/S above 32x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

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How JW (Cayman) Therapeutics Has Been Performing

While the industry has experienced revenue growth lately, JW (Cayman) Therapeutics' revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as depressed as JW (Cayman) Therapeutics' is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered a frustrating 9.0% decrease to the company's top line. In spite of this, the company still managed 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, but investors will want to ask why it is now in decline.

Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 73% each year over the next three years. That's shaping up to be materially lower than the 399% per year growth forecast for the broader industry.

In light of this, it's understandable that JW (Cayman) Therapeutics' P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From JW (Cayman) Therapeutics' P/S?

Shares in JW (Cayman) Therapeutics have risen appreciably however, its P/S is still subdued. 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 established that JW (Cayman) Therapeutics 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. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - JW (Cayman) Therapeutics has 2 warning signs we think you should be aware of.

If you're unsure about the strength of JW (Cayman) Therapeutics' 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.