Evolus, Inc. (NASDAQ:EOLS) shares have continued their recent momentum with a 27% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 30%.

Following the firm bounce in price, Evolus' price-to-sales (or "P/S") ratio of 4x might make it look like a sell right now compared to the wider Pharmaceuticals industry in the United States, where around half of the companies have P/S ratios below 2.9x and even P/S below 0.7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

What Does Evolus' P/S Mean For Shareholders?

Evolus could be doing better as it's been growing revenue less than most other companies lately. 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.

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

There's an inherent assumption that a company should outperform the industry for P/S ratios like Evolus' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 32% last year. The strong recent performance means it was also able to grow revenue by 233% 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 32% per year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 53% per annum, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Evolus' P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.

What Does Evolus' P/S Mean For Investors?

The large bounce in Evolus' shares has lifted the company's P/S handsomely. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Evolus, this doesn't appear to be impacting the P/S in the slightest. 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.

It is also worth noting that we have found 4 warning signs for Evolus (1 shouldn't be ignored!) 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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