Despite an already strong run, Eton Pharmaceuticals, Inc. (NASDAQ:ETON) shares have been powering on, with a gain of 29% in the last thirty days. The annual gain comes to 187% following the latest surge, making investors sit up and take notice.

After such a large jump in price, when almost half of the companies in the United States' Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 2.7x, you may consider Eton Pharmaceuticals as a stock not worth researching with its 8.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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

Recent times haven't been great for Eton Pharmaceuticals as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. 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?

Eton 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.

If we review the last year of revenue growth, the company posted a worthy increase of 8.1%. Pleasingly, revenue has also lifted 111% in aggregate from three years ago, partly 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 50% per year as estimated by the dual analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 20% per annum, which is noticeably less attractive.

With this in mind, it's not hard to understand why Eton Pharmaceuticals' P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Eton Pharmaceuticals' P/S?

The strong share price surge has lead to Eton Pharmaceuticals' P/S soaring as well. 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 Eton 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. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Eton Pharmaceuticals with six simple checks.

If these risks are making you reconsider your opinion on Eton Pharmaceuticals, 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.