Pacific Edge Limited (NZSE:PEB) Held Back By Insufficient Growth Even After Shares Climb 39%

Despite an already strong run, Pacific Edge Limited (NZSE:PEB) shares have been powering on, with a gain of 39% in the last thirty days. The last 30 days bring the annual gain to a very sharp 36%.

In spite of the firm bounce in price, Pacific Edge may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 6.3x, considering almost half of all companies in the Biotechs industry in New Zealand have P/S ratios greater than 16.8x and even P/S higher than 41x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

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See our latest analysis for Pacific Edge

What Does Pacific Edge's P/S Mean For Shareholders?

Pacific Edge could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Keen to find out how analysts think Pacific Edge's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Pacific Edge would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered a frustrating 9.8% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 73% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Looking ahead now, revenue is anticipated to slump, contracting by 7.5% each year during the coming three years according to the two analysts following the company. With the industry predicted to deliver 46% growth each year, that's a disappointing outcome.

With this in consideration, we find it intriguing that Pacific Edge's P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Pacific Edge's P/S

Even after such a strong price move, Pacific Edge's P/S still trails the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Pacific Edge's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, Pacific Edge's poor outlook justifies its low P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Pacific Edge you should know about.

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.