Adagene Inc. (NASDAQ:ADAG) Surges 26% Yet Its Low P/S Is No Reason For Excitement

Adagene Inc. (NASDAQ:ADAG) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 40%.

Even after such a large jump in price, Adagene may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 3.5x, considering almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 10.4x and even P/S higher than 44x 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.

View our latest analysis for Adagene

How Has Adagene Performed Recently?

Adagene certainly has been doing a good job lately as it's been growing revenue more than most other companies. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If you 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 Adagene's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Adagene's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as depressed as Adagene'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 78% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Shifting to the future, estimates from the only analyst covering the company suggest revenue growth is heading into negative territory, declining 100% per annum over the next three years. With the industry predicted to deliver 107% growth per year, that's a disappointing outcome.

With this in consideration, we find it intriguing that Adagene'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. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Adagene's P/S?

Adagene's recent share price jump still sees fails to bring its P/S alongside the industry median. 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.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Adagene's P/S is on the lower end of the spectrum. As other companies in the industry are forecasting revenue growth, Adagene's poor outlook justifies its low P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Adagene is showing 4 warning signs in our investment analysis, and 1 of those is concerning.

If you're unsure about the strength of Adagene'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.