Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 84% in the last year.

Following the firm bounce in price, Rhythm Pharmaceuticals may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 48.8x, since almost half of all companies in the Biotechs industry in the United States have P/S ratios under 13.6x and even P/S lower than 4x 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 Rhythm Pharmaceuticals' Recent Performance Look Like?

Recent times have been advantageous for Rhythm Pharmaceuticals as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is Rhythm Pharmaceuticals' Revenue Growth Trending?

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

Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months. Although, its longer-term performance hasn't been anywhere near as strong with three-year revenue growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 77% each year as estimated by the nine analysts watching the company. With the industry predicted to deliver 245% growth per annum, the company is positioned for a weaker revenue result.

With this information, we find it concerning that Rhythm Pharmaceuticals is trading at a P/S higher than the industry. 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.

The Final Word

Rhythm Pharmaceuticals' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 concluded that Rhythm Pharmaceuticals currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

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

If these risks are making you reconsider your opinion on Rhythm 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.