Insufficient Growth At Spero Therapeutics, Inc. (NASDAQ:SPRO) Hampers Share Price

Spero Therapeutics, Inc.'s (NASDAQ:SPRO) price-to-sales (or "P/S") ratio of 0.7x might make it look like a strong buy right now compared to the Biotechs industry in the United States, where around half of the companies have P/S ratios above 11.4x and even P/S above 64x 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 Spero Therapeutics

What Does Spero Therapeutics' P/S Mean For Shareholders?

There hasn't been much to differentiate Spero Therapeutics' and the industry's revenue growth lately. One possibility is that the P/S ratio is low because investors think this modest revenue performance may begin to slide. Those who are bullish on Spero Therapeutics will be hoping that this isn't the case.

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

Is There Any Revenue Growth Forecasted For Spero Therapeutics?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Spero Therapeutics' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 107%. This great performance means it was also able to deliver immense revenue growth over the last three years. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 18% per year as estimated by the three analysts watching the company. That's not great when the rest of the industry is expected to grow by 208% each year.

With this information, we are not surprised that Spero Therapeutics 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 We Can Learn From Spero Therapeutics' P/S?

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.

It's clear to see that Spero Therapeutics maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. As other companies in the industry are forecasting revenue growth, Spero Therapeutics' 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.

Before you take the next step, you should know about the 2 warning signs for Spero Therapeutics that we have uncovered.

If you're unsure about the strength of Spero Therapeutics' 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.

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