There's Reason For Concern Over Legend Biotech Corporation's (NASDAQ:LEGN) Price
Legend Biotech Corporation's (NASDAQ:LEGN) price-to-sales (or "P/S") ratio of 46.8x might make it look like a strong sell right now compared to the Biotechs industry in the United States, where around half of the companies have P/S ratios below 10.6x and even P/S below 3x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.
Check out our latest analysis for Legend Biotech
How Legend Biotech Has Been Performing
With revenue growth that's superior to most other companies of late, Legend Biotech has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. 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 Legend Biotech will help you uncover what's on the horizon.
Is There Enough Revenue Growth Forecasted For Legend Biotech?
The only time you'd be truly comfortable seeing a P/S as steep as Legend Biotech's is when the company's growth is on track to outshine the industry decidedly.
If we review the last year of revenue growth, the company posted a terrific increase of 120%. The strong recent performance means it was also able to grow revenue by 298% in total over the last three years. 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 91% per year over the next three years. With the industry predicted to deliver 195% growth per year, the company is positioned for a weaker revenue result.
With this in consideration, we believe it doesn't make sense that Legend Biotech's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.
The Bottom Line On Legend Biotech's P/S
Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
It comes as a surprise to see Legend Biotech trade at such a high P/S given the revenue forecasts look less than stellar. 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Legend Biotech that you should be aware of.
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.
