Aytu BioPharma, Inc. (NASDAQ:AYTU) Surges 25% Yet Its Low P/S Is No Reason For Excitement

Despite an already strong run, Aytu BioPharma, Inc. (NASDAQ:AYTU) shares have been powering on, with a gain of 25% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 6.5% isn't as attractive.

Although its price has surged higher, Aytu BioPharma's price-to-sales (or "P/S") ratio of 0.2x might still make it look like a strong buy right now compared to the wider Pharmaceuticals industry in the United States, where around half of the companies have P/S ratios above 3.4x and even P/S above 18x 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.

See our latest analysis for Aytu BioPharma

What Does Aytu BioPharma's Recent Performance Look Like?

Aytu BioPharma could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. 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.

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

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

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

Retrospectively, the last year delivered a frustrating 6.7% 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 91% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 18% as estimated by the lone analyst watching the company. With the industry predicted to deliver 28% growth, that's a disappointing outcome.

In light of this, it's understandable that Aytu BioPharma's P/S would sit below the majority of other companies. 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.

The Key Takeaway

Even after such a strong price move, Aytu BioPharma's P/S still trails the rest of the industry. 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.

As we suspected, our examination of Aytu BioPharma's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Aytu BioPharma you should be aware of, and 1 of them is significant.

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.