Some Shareholders Feeling Restless Over Arbutus Biopharma Corporation's (NASDAQ:ABUS) P/S Ratio

Arbutus Biopharma Corporation's (NASDAQ:ABUS) price-to-sales (or "P/S") ratio of 12x might make it look like a sell right now compared to the Biotechs industry in the United States, where around half of the companies have P/S ratios below 10x and even P/S below 2x are quite common. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Arbutus Biopharma

How Arbutus Biopharma Has Been Performing

Arbutus Biopharma could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Arbutus Biopharma's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 29% decrease to the company's top line. Even so, admirably revenue has lifted 206% in aggregate from three years ago, notwithstanding the last 12 months. 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 25% each year during the coming three years according to the five analysts following the company. With the industry predicted to deliver 103% growth per year, that's a disappointing outcome.

In light of this, it's alarming that Arbutus Biopharma's P/S sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

The Key Takeaway

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 Arbutus Biopharma's analyst forecasts revealed that its shrinking revenue outlook isn't drawing down its high P/S anywhere near as much as we would have predicted. Right now we aren't comfortable with the high P/S as the predicted future revenue decline likely to impact the positive sentiment that's propping up the P/S. Unless these conditions improve markedly, it'll be a challenging time for shareholders.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Arbutus Biopharma that you need to be mindful 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.