Despite an already strong run, Codexis, Inc. (NASDAQ:CDXS) shares have been powering on, with a gain of 28% in the last thirty days. The annual gain comes to 105% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given close to half the companies operating in the United States' Life Sciences industry have price-to-sales ratios (or "P/S") below 3.7x, you may consider Codexis as a stock to potentially avoid with its 5.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

What Does Codexis' P/S Mean For Shareholders?

Codexis hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Codexis?

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

Retrospectively, the last year delivered a frustrating 13% decrease to the company's top line. As a result, revenue from three years ago have also fallen 36% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 20% per year during the coming three years according to the eight analysts following the company. That's shaping up to be materially higher than the 7.3% each year growth forecast for the broader industry.

With this information, we can see why Codexis is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The large bounce in Codexis' shares has lifted the company's P/S handsomely. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Codexis' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. 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.

You always need to take note of risks, for example - Codexis has 2 warning signs we think you should be aware of.

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.