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It's not a stretch to say that AVITA Medical, Inc.'s (ASX:AVH) price-to-sales (or "P/S") ratio of 12.3x right now seems quite "middle-of-the-road" for companies in the Biotechs industry in Australia, where the median P/S ratio is around 13.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
View our latest analysis for AVITA Medical
How Has AVITA Medical Performed Recently?
AVITA Medical could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. 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 AVITA Medical will help you uncover what's on the horizon.
Do Revenue Forecasts Match The P/S Ratio?
The only time you'd be comfortable seeing a P/S like AVITA Medical's is when the company's growth is tracking the industry closely.
Taking a look back first, we see that the company managed to grow revenues by a handy 4.2% last year. Pleasingly, revenue has also lifted 221% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.
Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 38% per year over the next three years. That's shaping up to be materially higher than the 33% per annum growth forecast for the broader industry.
With this information, we find it interesting that AVITA Medical is trading at a fairly similar P/S compared to the industry. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.
The Bottom Line On AVITA Medical'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.
Despite enticing revenue growth figures that outpace the industry, AVITA Medical's P/S isn't quite what we'd expect. Perhaps uncertainty in the revenue forecasts are what's keeping the P/S ratio consistent with the rest of the industry. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.
Before you settle on your opinion, we've discovered 1 warning sign for AVITA Medical that you should be aware of.