You may think that with a price-to-sales (or "P/S") ratio of 12.3x Tarsus Pharmaceuticals, Inc. (NASDAQ:TARS) is a stock to avoid completely, seeing as almost half of all the Pharmaceuticals companies in the United States have P/S ratios under 3.1x and even P/S lower than 0.8x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

What Does Tarsus Pharmaceuticals' P/S Mean For Shareholders?

Tarsus Pharmaceuticals certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

Tarsus Pharmaceuticals' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an explosive gain to the company's top line. The amazing performance means it was also able to grow revenue by 50% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 90% per annum over the next three years. That's shaping up to be materially higher than the 16% each year growth forecast for the broader industry.

With this information, we can see why Tarsus Pharmaceuticals is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Tarsus Pharmaceuticals maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Pharmaceuticals industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Tarsus Pharmaceuticals you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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