The Zymeworks Inc. (NASDAQ:ZYME) share price has softened a substantial 27% over the previous 30 days, handing back much of the gains the stock has made lately. Looking at the bigger picture, even after this poor month the stock is up 40% in the last year.

Although its price has dipped substantially, Zymeworks may still be sending sell signals at present with a price-to-sales (or "P/S") ratio of 14x, when you consider almost half of the companies in the Biotechs industry in the United States have P/S ratios under 10.2x and even P/S lower than 3x aren't out of the ordinary. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Zymeworks' P/S Mean For Shareholders?

Zymeworks could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

In order to justify its P/S ratio, Zymeworks would need to produce impressive growth in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 87%. Still, the latest three year period has seen an excellent 177% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 33% each year over the next three years. That's shaping up to be materially lower than the 117% each year growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Zymeworks' 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. 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.

What We Can Learn From Zymeworks' P/S?

There's still some elevation in Zymeworks' P/S, even if the same can't be said for its share price recently. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've concluded that Zymeworks currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 1 warning sign for Zymeworks that we have uncovered.

If you're unsure about the strength of Zymeworks' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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