Why Investors Shouldn't Be Surprised By Tarsus Pharmaceuticals, Inc.'s (NASDAQ:TARS) P/S

With a price-to-sales (or "P/S") ratio of 7.2x Tarsus Pharmaceuticals, Inc. (NASDAQ:TARS) may be sending bearish signals at the moment, given that almost half of all Pharmaceuticals companies in the United States have P/S ratios under 4.8x and even P/S lower than 1.3x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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View our latest analysis for Tarsus Pharmaceuticals

How Tarsus Pharmaceuticals Has Been Performing

Recent times have been advantageous for Tarsus Pharmaceuticals as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Tarsus Pharmaceuticals' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

If we review the last year of revenue growth, we see the company's revenues grew exponentially. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 50% per annum as estimated by the seven analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 19% per year, which is noticeably less attractive.

With this information, we can see why Tarsus Pharmaceuticals 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.

What We Can Learn From Tarsus Pharmaceuticals' P/S?

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 Tarsus Pharmaceuticals 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. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Tarsus Pharmaceuticals with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Tarsus Pharmaceuticals, 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.