Risks Still Elevated At These Prices As XOMA Royalty Corporation (NASDAQ:XOMA) Shares Dive 25%

The XOMA Royalty Corporation (NASDAQ:XOMA) share price has fared very poorly over the last month, falling by a substantial 25%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 21% share price drop.

Although its price has dipped substantially, it's still not a stretch to say that XOMA Royalty's price-to-sales (or "P/S") ratio of 11.1x right now seems quite "middle-of-the-road" compared to the Biotechs industry in the United States, where the median P/S ratio is around 9.6x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for XOMA Royalty

How XOMA Royalty Has Been Performing

With revenue growth that's superior to most other companies of late, XOMA Royalty has been doing relatively well. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

Is There Some Revenue Growth Forecasted For XOMA Royalty?

XOMA Royalty's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

If we review the last year of revenue growth, we see the company's revenues grew exponentially. Still, revenue has fallen 27% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 42% per year during the coming three years according to the three analysts following the company. That's shaping up to be materially lower than the 138% per annum growth forecast for the broader industry.

With this information, we find it interesting that XOMA Royalty is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On XOMA Royalty's P/S

XOMA Royalty's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

When you consider that XOMA Royalty'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. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for XOMA Royalty with six simple checks on some of these key factors.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.