The Market Doesn't Like What It Sees From Clal Biotechnology Industries Ltd.'s (TLV:CBI) Revenues Yet

Clal Biotechnology Industries Ltd.'s (TLV:CBI) price-to-sales (or "P/S") ratio of 1.3x might make it look like a strong buy right now compared to the Biotechs industry in Israel, where around half of the companies have P/S ratios above 5.6x and even P/S above 55x 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.

View our latest analysis for Clal Biotechnology Industries

What Does Clal Biotechnology Industries' P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Clal Biotechnology Industries has been doing very well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. Those who are bullish on Clal Biotechnology Industries will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Clal Biotechnology Industries will help you shine a light on its historical performance.

How Is Clal Biotechnology Industries' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as depressed as Clal Biotechnology Industries' is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered an exceptional 249% gain to the company's top line. Still, revenue has fallen 21% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 67% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we understand why Clal Biotechnology Industries' P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Bottom Line On Clal Biotechnology Industries' P/S

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.

As we suspected, our examination of Clal Biotechnology Industries revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term 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 2 warning signs for Clal Biotechnology Industries (1 is a bit concerning!) that you need to take into consideration.

If you're unsure about the strength of Clal Biotechnology Industries' 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.