AVITA Medical, Inc.'s (NASDAQ:RCEL) price-to-sales (or "P/S") ratio of 3.5x might make it look like a strong buy right now compared to the Biotechs industry in the United States, where around half of the companies have P/S ratios above 9.1x and even P/S above 54x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

See 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 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.

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Is There Any Revenue Growth Forecasted For AVITA Medical?

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

Retrospectively, the last year delivered an exceptional 28% gain to the company's top line. Pleasingly, revenue has also lifted 95% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 45% per annum as estimated by the eleven analysts watching the company. That's shaping up to be materially lower than the 125% each year growth forecast for the broader industry.

With this in consideration, its clear as to why AVITA Medical's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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 AVITA Medical's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You always need to take note of risks, for example - AVITA Medical has 1 warning sign we think you should be aware of.

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.

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