Revenues Working Against Hester Biosciences Limited's (NSE:HESTERBIO) Share Price

Hester Biosciences Limited's (NSE:HESTERBIO) price-to-sales (or "P/S") ratio of 5.1x might make it look like a buy right now compared to the Biotechs industry in India, where around half of the companies have P/S ratios above 6.8x and even P/S above 12x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Hester Biosciences

What Does Hester Biosciences' P/S Mean For Shareholders?

The revenue growth achieved at Hester Biosciences over the last year would be more than acceptable for most companies. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Although there are no analyst estimates available for Hester Biosciences, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

There's an inherent assumption that a company should underperform the industry for P/S ratios like Hester Biosciences' to be considered reasonable.

Retrospectively, the last year delivered a decent 13% gain to the company's revenues. The latest three year period has also seen an excellent 45% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 145% shows it's noticeably less attractive.

In light of this, it's understandable that Hester Biosciences' P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Key Takeaway

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.

Our examination of Hester Biosciences confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Hester Biosciences (2 are a bit concerning) you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.