Risks To Shareholder Returns Are Elevated At These Prices For Scilex Holding Company (NASDAQ:SCLX)

With a median price-to-sales (or "P/S") ratio of close to 2.8x in the Pharmaceuticals industry in the United States, you could be forgiven for feeling indifferent about Scilex Holding Company's (NASDAQ:SCLX) P/S ratio, which comes in at about the same. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Scilex Holding

What Does Scilex Holding's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Scilex Holding has been relatively sluggish. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Keen to find out how analysts think Scilex Holding's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Scilex Holding's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Scilex Holding's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered an exceptional 31% gain to the company's top line. The latest three year period has also seen an excellent 92% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 37% per year as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 53% per annum growth forecast for the broader industry.

In light of this, it's curious that Scilex Holding's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

When you consider that Scilex Holding's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

Before you take the next step, you should know about the 4 warning signs for Scilex Holding (3 are potentially serious!) that we have uncovered.

If you're unsure about the strength of Scilex Holding'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.