Investors Don't See Light At End Of Zai Lab Limited's (NASDAQ:ZLAB) Tunnel

You may think that with a price-to-sales (or "P/S") ratio of 7.9x Zai Lab Limited (NASDAQ:ZLAB) is a stock worth checking out, seeing as almost half of all the Biotechs companies in the United States have P/S ratios greater than 10.2x and even P/S higher than 61x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for Zai Lab

How Zai Lab Has Been Performing

Recent times haven't been great for Zai Lab as its revenue has been rising slower than most other companies. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

How Is Zai Lab's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 35% last year. The latest three year period has also seen an excellent 209% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 49% each year as estimated by the analysts watching the company. With the industry predicted to deliver 131% growth per year, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Zai Lab's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Zai Lab's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Zai Lab with six simple checks.

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.