Nxera Pharma Co., Ltd.'s (TSE:4565) P/S Still Appears To Be Reasonable

When close to half the companies in the Pharmaceuticals industry in Japan have price-to-sales ratios (or "P/S") below 1.9x, you may consider Nxera Pharma Co., Ltd. (TSE:4565) as a stock to avoid entirely with its 8.8x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Nxera Pharma

What Does Nxera Pharma's P/S Mean For Shareholders?

Nxera Pharma's revenue growth of late has been pretty similar to most other companies. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Nxera Pharma will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Nxera Pharma?

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

Retrospectively, the last year delivered a decent 6.8% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 85% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 40% each year as estimated by the nine analysts watching the company. With the industry only predicted to deliver 6.8% per annum, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Nxera Pharma's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Nxera Pharma maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Pharmaceuticals industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for Nxera Pharma that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com