Equillium, Inc.'s (NASDAQ:EQ) Price Is Right But Growth Is Lacking After Shares Rocket 27%

Equillium, Inc. (NASDAQ:EQ) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 43% in the last twelve months.

In spite of the firm bounce in price, Equillium's price-to-sales (or "P/S") ratio of 0.7x might still make it look like a strong buy right now compared to the wider Biotechs industry in the United States, where around half of the companies have P/S ratios above 9.9x and even P/S above 57x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

View our latest analysis for Equillium

What Does Equillium's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Equillium has been relatively sluggish. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

Keen to find out how analysts think Equillium'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?

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

Retrospectively, the last year delivered a decent 7.7% gain to the company's revenues. Still, revenue has barely risen at all in aggregate from three years ago, which is not ideal. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Looking ahead now, revenue is anticipated to slump, contracting by 4.2% per year during the coming three years according to the three analysts following the company. That's not great when the rest of the industry is expected to grow by 141% per year.

With this information, we are not surprised that Equillium is trading at a P/S lower than the industry. 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.

What Does Equillium's P/S Mean For Investors?

Equillium's recent share price jump still sees fails to bring its P/S alongside the industry median. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Equillium'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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 5 warning signs with Equillium (at least 2 which make us uncomfortable), and understanding these should be part of your investment process.

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.