You may think that with a price-to-sales (or "P/S") ratio of 16.1x Intra-Cellular Therapies, Inc. (NASDAQ:ITCI) is a stock to avoid completely, seeing as almost half of all the Pharmaceuticals companies in the United States have P/S ratios under 3.1x and even P/S lower than 0.7x aren't out of the ordinary.   Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.  

View our latest analysis for Intra-Cellular Therapies

NasdaqGS:ITCI Price to Sales Ratio vs Industry January 3rd 2024

What Does Intra-Cellular Therapies' P/S Mean For Shareholders?

Recent times have been advantageous for Intra-Cellular Therapies 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.  However, if this isn't the case, investors might get caught out paying too much for the stock.    

Keen to find out how analysts think Intra-Cellular Therapies' future stacks up against the industry? In that case, our free report is a great place to start.

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

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

Taking a look back first, we see that the company grew revenue by an impressive 123% last year.    This great performance means it was also able to deliver immense revenue growth over the last three years.  Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.  

Looking ahead now, revenue is anticipated to climb by 44% each year during the coming three years according to the analysts following the company.  That's shaping up to be materially lower than the 54% each year growth forecast for the broader industry.

In light of this, it's alarming that Intra-Cellular Therapies' P/S sits above the majority of other companies.  It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen.  There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.  

The Key Takeaway

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

It comes as a surprise to see Intra-Cellular Therapies trade at such a high P/S given the revenue forecasts look less than stellar.  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.    

We don't want to rain on the parade too much, but we did also find 1 warning sign for Intra-Cellular Therapies that you need to be mindful of.  

If these risks are making you reconsider your opinion on Intra-Cellular Therapies, 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.