NeuroPace, Inc. (NASDAQ:NPCE) shares have continued their recent momentum with a 34% gain in the last month alone. The last 30 days were the cherry on top of the stock's 329% gain in the last year, which is nothing short of spectacular.

After such a large jump in price, given around half the companies in the United States' Medical Equipment industry have price-to-sales ratios (or "P/S") below 3.3x, you may consider NeuroPace as a stock to avoid entirely with its 7.3x 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 NeuroPace's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, NeuroPace has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is NeuroPace's Revenue Growth Trending?

In order to justify its P/S ratio, NeuroPace would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 38%. The strong recent performance means it was also able to grow revenue by 46% 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.

Looking ahead now, revenue is anticipated to climb by 23% per annum during the coming three years according to the seven analysts following the company. That's shaping up to be materially higher than the 10.0% per annum growth forecast for the broader industry.

With this in mind, it's not hard to understand why NeuroPace's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On NeuroPace's P/S

The strong share price surge has lead to NeuroPace's 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 NeuroPace maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Medical Equipment industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with NeuroPace, and understanding them should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.