AVITA Medical, Inc.'s (NASDAQ:RCEL) Share Price Boosted 26% But Its Business Prospects Need A Lift Too

AVITA Medical, Inc. (NASDAQ:RCEL) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 48% over that time.

Even after such a large jump in price, AVITA Medical's price-to-sales (or "P/S") ratio of 5.2x 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 11.8x and even P/S above 67x 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.

View our latest analysis for AVITA Medical

What Does AVITA Medical's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, AVITA Medical 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.

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

Is There Any Revenue Growth Forecasted For AVITA Medical?

AVITA Medical's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Retrospectively, the last year delivered an exceptional 35% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 122% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 39% each year during the coming three years according to the eleven analysts following the company. With the industry predicted to deliver 209% growth per annum, the company is positioned for a weaker revenue result.

With this information, we can see why AVITA Medical is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What Does AVITA Medical's P/S Mean For Investors?

Even after such a strong price move, AVITA Medical's P/S still trails the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As expected, our analysis of AVITA Medical's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for AVITA Medical that you should be aware of.

If these risks are making you reconsider your opinion on AVITA Medical, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com