Despite an already strong run, Societal CDMO, Inc. (NASDAQ:SCTL) shares have been powering on, with a gain of 29% in the last thirty days. But the last month did very little to improve the 67% share price decline over the last year.

Even after such a large jump in price, Societal CDMO may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 0.6x, considering almost half of all companies in the Pharmaceuticals industry in the United States have P/S ratios greater than 3x and even P/S higher than 18x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

What Does Societal CDMO's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Societal CDMO has been relatively sluggish. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

In order to justify its P/S ratio, Societal CDMO would need to produce anemic growth that's substantially trailing the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 3.4%. The solid recent performance means it was also able to grow revenue by 23% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 5.9% per annum as estimated by the four analysts watching the company. That's shaping up to be materially lower than the 48% each year growth forecast for the broader industry.

In light of this, it's understandable that Societal CDMO's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Societal CDMO's P/S?

Shares in Societal CDMO have risen appreciably however, its P/S is still subdued. 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.

As we suspected, our examination of Societal CDMO's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

Plus, you should also learn about these 5 warning signs we've spotted with Societal CDMO.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.