Merus N.V. (NASDAQ:MRUS) shares have continued their recent momentum with a 39% gain in the last month alone. The last month tops off a massive increase of 119% in the last year.

Following the firm bounce in price, Merus may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 41.9x, when you consider almost half of the companies in the Biotechs industry in the United States have P/S ratios under 13.7x and even P/S lower than 4x 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 elevated P/S.

Check out our latest analysis for Merus

How Merus Has Been Performing

Merus could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Merus would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. However, a few strong years before that means that it was still able to grow revenue by an impressive 59% in total over the last three years. So while the company has done a solid job in the past, it's somewhat concerning to see revenue growth decline as much as it has.

Turning to the outlook, the next three years should generate growth of 37% per annum as estimated by the twelve analysts watching the company. That's shaping up to be materially lower than the 240% per year growth forecast for the broader industry.

With this information, we find it concerning that Merus is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Merus' P/S

Shares in Merus have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

It comes as a surprise to see Merus trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 4 warning signs for Merus you should be aware of.

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.