Improved Revenues Required Before Zai Lab Limited (NASDAQ:ZLAB) Stock's 50% Jump Looks Justified

Zai Lab Limited (NASDAQ:ZLAB) shareholders would be excited to see that the share price has had a great month, posting a 50% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 36% in the last twelve months.

Even after such a large jump in price, Zai Lab may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 7.3x, since almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 12.5x and even P/S higher than 67x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Zai Lab

What Does Zai Lab's Recent Performance Look Like?

Recent times haven't been great for Zai Lab as its revenue has been rising slower than most other companies. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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Is There Any Revenue Growth Forecasted For Zai Lab?

In order to justify its P/S ratio, Zai Lab would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 26% last year. This great performance means it was also able to deliver immense revenue growth 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 54% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 210% per year, which is noticeably more attractive.

With this in consideration, its clear as to why Zai Lab's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Zai Lab's P/S?

Despite Zai Lab's share price climbing recently, its P/S still lags most other companies. 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.

We've established that Zai Lab maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Zai Lab you should know about.

If these risks are making you reconsider your opinion on Zai Lab, 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.