Further Upside For Pacific Edge Limited (NZSE:PEB) Shares Could Introduce Price Risks After 33% Bounce

Pacific Edge Limited (NZSE:PEB) shareholders have had their patience rewarded with a 33% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 3.2% isn't as attractive.

Even after such a large jump in price, Pacific Edge's price-to-sales (or "P/S") ratio of 4.2x might still make it look like a strong buy right now compared to the wider Biotechs industry in New Zealand, where around half of the companies have P/S ratios above 10.3x and even P/S above 35x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Pacific Edge

How Pacific Edge Has Been Performing

The revenue growth achieved at Pacific Edge 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. Those who are bullish on Pacific Edge will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for Pacific Edge, 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?

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

Taking a look back first, we see that the company grew revenue by an impressive 20% last year. The latest three year period has also seen an excellent 181% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that to the industry, which is only predicted to deliver 8.4% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

In light of this, it's peculiar that Pacific Edge's P/S sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On Pacific Edge's P/S

Pacific Edge's recent share price jump still sees fails to bring its P/S alongside the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Pacific Edge revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to perceive a likelihood of revenue fluctuations in the future.

Plus, you should also learn about these 3 warning signs we've spotted with Pacific Edge.

If you're unsure about the strength of Pacific Edge's 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.