Despite an already strong run, Delcath Systems, Inc. (NASDAQ:DCTH) shares have been powering on, with a gain of 28% in the last thirty days. The last month tops off a massive increase of 248% in the last year.

Since its price has surged higher, Delcath Systems may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 25.8x, since almost half of all companies in the Medical Equipment industry in the United States have P/S ratios under 3.4x and even P/S lower than 1.2x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Delcath Systems' P/S Mean For Shareholders?

Delcath Systems 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For Delcath Systems?

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

Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 131% per year as estimated by the six analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 9.3% per year, which is noticeably less attractive.

In light of this, it's understandable that Delcath Systems' P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Delcath Systems' P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Delcath Systems maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Medical Equipment 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Delcath Systems (1 is a bit unpleasant) you should be aware of.

If these risks are making you reconsider your opinion on Delcath Systems, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.