LigaChem Biosciences Inc.'s (KOSDAQ:141080) Share Price Could Signal Some Risk

LigaChem Biosciences Inc.'s (KOSDAQ:141080) price-to-sales (or "P/S") ratio of 35.3x might make it look like a strong sell right now compared to the Life Sciences industry in Korea, where around half of the companies have P/S ratios below 3.6x and even P/S below 1.3x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for LigaChem Biosciences

What Does LigaChem Biosciences' Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, LigaChem Biosciences has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on LigaChem Biosciences.

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

LigaChem Biosciences' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 194% gain to the company's top line. The latest three year period has also seen an excellent 215% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 9.4% per year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 17% per year, which is noticeably more attractive.

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

The Key Takeaway

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 concluded that LigaChem Biosciences currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - LigaChem Biosciences has 1 warning sign we think you should be aware of.

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.