Castle Biosciences, Inc. (NASDAQ:CSTL) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 12% in that time.

Even after such a large drop in price, you could still be forgiven for thinking Castle Biosciences is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.4x, considering almost half the companies in the United States' Healthcare industry have P/S ratios below 1x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How Castle Biosciences Has Been Performing

Recent times have been advantageous for Castle Biosciences as its revenues have been rising faster than most other companies. 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.

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

In order to justify its P/S ratio, Castle Biosciences would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 60% last year. The strong recent performance means it was also able to grow revenue by 251% 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 9.7% per annum during the coming three years according to the nine analysts following the company. With the industry predicted to deliver 7.7% growth each year, the company is positioned for a comparable revenue result.

With this information, we find it interesting that Castle Biosciences is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

What We Can Learn From Castle Biosciences' P/S?

Castle Biosciences' P/S remain high even after its stock plunged. 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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Castle Biosciences currently trades on a higher than expected P/S. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Castle Biosciences is showing 3 warning signs in our investment analysis, you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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