Axsome Therapeutics, Inc.'s (NASDAQ:AXSM) price-to-sales (or "P/S") ratio of 14x might make it look like a strong sell right now compared to the Pharmaceuticals industry in the United States, where around half of the companies have P/S ratios below 2.9x and even P/S below 0.9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Axsome Therapeutics Has Been Performing

With revenue growth that's superior to most other companies of late, Axsome Therapeutics has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is Axsome Therapeutics' Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 51% gain to the company's top line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 60% each year over the next three years. That's shaping up to be materially higher than the 19% each year growth forecast for the broader industry.

With this information, we can see why Axsome Therapeutics is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Axsome Therapeutics 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. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Axsome Therapeutics, and understanding should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.