JW (Cayman) Therapeutics Co. Ltd (HKG:2126) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 25% over that time.

In spite of the firm bounce in price, JW (Cayman) Therapeutics may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 5x, considering almost half of all companies in the Biotechs industry in Hong Kong have P/S ratios greater than 11x and even P/S higher than 31x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

What Does JW (Cayman) Therapeutics' P/S Mean For Shareholders?

Recent times haven't been great for JW (Cayman) Therapeutics as its revenue has been rising slower than most other companies. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

Is There Any Revenue Growth Forecasted For JW (Cayman) Therapeutics?

The only time you'd be truly comfortable seeing a P/S as depressed as JW (Cayman) Therapeutics' is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered an exceptional 19% gain to the company's top line. Still, revenue has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 55% each year as estimated by the three analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 53% per annum, which is not materially different.

With this in consideration, we find it intriguing that JW (Cayman) Therapeutics' P/S is lagging behind its industry peers. It may be that most investors are not convinced the company can achieve future growth expectations.

The Key Takeaway

Even after such a strong price move, JW (Cayman) Therapeutics' P/S still trails the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of JW (Cayman) Therapeutics' revealed that its P/S remains low despite analyst forecasts of revenue growth matching the wider industry. When we see middle-of-the-road revenue growth like this, we assume it must be the potential risks that are what is placing pressure on the P/S ratio. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with JW (Cayman) Therapeutics, and understanding 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.