Potential Upside For Adagene Inc. (NASDAQ:ADAG) Not Without Risk
Adagene Inc.'s (NASDAQ:ADAG) price-to-sales (or "P/S") ratio of 2.8x 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 11.2x and even P/S above 49x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.
Check out our latest analysis for Adagene
How Adagene Has Been Performing
With revenue growth that's superior to most other companies of late, Adagene has been doing relatively well. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Keen to find out how analysts think Adagene's future stacks up against the industry? In that case, our free report is a great place to start.
How Is Adagene's Revenue Growth Trending?
Adagene's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.
Taking a look back first, we see that the company grew revenue by an impressive 78% last year. This great performance means it was also able to deliver immense revenue growth over the last three years. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.
Looking ahead now, revenue is anticipated to climb by 129% each year during the coming three years according to the three analysts following the company. With the industry predicted to deliver 124% growth per annum, the company is positioned for a comparable revenue result.
With this in consideration, we find it intriguing that Adagene's P/S is lagging behind its industry peers. It may be that most investors are not convinced the company can achieve future growth expectations.
What Does Adagene's P/S Mean For Investors?
Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
It looks to us like the P/S figures for Adagene remain low despite growth that is expected to be in line with other companies in the industry. Despite average revenue growth estimates, there could be some unobserved threats keeping the P/S low. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 5 warning signs with Adagene (at least 3 which are potentially serious), and understanding them should be part of your investment process.
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.
