Getting In Cheap On Lyka Labs Limited (NSE:LYKALABS) Is Unlikely

When you see that almost half of the companies in the Pharmaceuticals industry in India have price-to-sales ratios (or "P/S") below 2.7x, Lyka Labs Limited (NSE:LYKALABS) looks to be giving off some sell signals with its 3.4x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Our free stock report includes 1 warning sign investors should be aware of before investing in Lyka Labs. Read for free now.

View our latest analysis for Lyka Labs

What Does Lyka Labs' Recent Performance Look Like?

Revenue has risen firmly for Lyka Labs recently, which is pleasing to see. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Lyka Labs' earnings, revenue and cash flow.

How Is Lyka Labs' Revenue Growth Trending?

In order to justify its P/S ratio, Lyka Labs would need to produce impressive growth in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 25%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 23% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 15% shows it's an unpleasant look.

With this information, we find it concerning that Lyka Labs is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

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.

Our examination of Lyka Labs revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Lyka Labs you should know about.

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.