Revenues Not Telling The Story For Zai Lab Limited (NASDAQ:ZLAB)
Zai Lab Limited's (NASDAQ:ZLAB) price-to-sales (or "P/S") ratio of 17.3x might make it look like a sell right now compared to the Biotechs industry in the United States, where around half of the companies have P/S ratios below 11.8x and even P/S below 4x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.
See our latest analysis for Zai Lab
What Does Zai Lab's Recent Performance Look Like?
Zai Lab's revenue growth of late has been pretty similar to most other companies. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Zai Lab.
Is There Enough Revenue Growth Forecasted For Zai Lab?
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 49% last year. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.
Looking ahead now, revenue is anticipated to climb by 62% 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 95% each year, which is noticeably more attractive.
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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.
The Key Takeaway
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.
Despite analysts forecasting some poorer-than-industry revenue growth figures for Zai Lab, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Zai Lab that you need to be mindful 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.
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