Revenues Not Telling The Story For Zai Lab Limited (NASDAQ:ZLAB) After Shares Rise 33%

Zai Lab Limited (NASDAQ:ZLAB) shares have had a really impressive month, gaining 33% after a shaky period beforehand. The annual gain comes to 116% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Zai Lab may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 10.6x, since almost half of all companies in the Biotechs in the United States have P/S ratios under 8.2x and even P/S lower than 3x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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View our latest analysis for Zai Lab

What Does Zai Lab's Recent Performance Look Like?

Zai Lab could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Zai Lab will help you uncover what's on the horizon.

How Is Zai Lab's Revenue Growth Trending?

There's an inherent assumption that a company should outperform 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 44% last year. The latest three year period has also seen an excellent 145% 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.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 50% each year over the next three years. That's shaping up to be materially lower than the 112% each year growth forecast for the broader industry.

With this information, we find it concerning that Zai Lab is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Zai Lab's P/S Mean For Investors?

Zai Lab shares have taken a big step in a northerly direction, but its P/S is elevated as a result. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've concluded that Zai Lab currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

You always need to take note of risks, for example - Zai Lab has 2 warning signs we think you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.