Investors Don't See Light At End Of XOMA Royalty Corporation's (NASDAQ:XOMA) Tunnel

You may think that with a price-to-sales (or "P/S") ratio of 6.6x XOMA Royalty Corporation (NASDAQ:XOMA) is a stock worth checking out, seeing as almost half of all the Biotechs companies in the United States have P/S ratios greater than 12.1x and even P/S higher than 93x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for XOMA Royalty

How XOMA Royalty Has Been Performing

XOMA Royalty 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 this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Keen to find out how analysts think XOMA Royalty's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Revenue Growth Forecasted For XOMA Royalty?

The only time you'd be truly comfortable seeing a P/S as low as XOMA Royalty's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered an exceptional 118% gain to the company's top line. The latest three year period has also seen a 16% overall rise in revenue, aided extensively by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 40% per annum over the next three years. That's shaping up to be materially lower than the 132% per year growth forecast for the broader industry.

In light of this, it's understandable that XOMA Royalty's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

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.

We've established that XOMA Royalty maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.

It is also worth noting that we have found 2 warning signs for XOMA Royalty that you need to take into consideration.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.