Tarsus Pharmaceuticals, Inc.'s (NASDAQ:TARS) price-to-sales (or "P/S") ratio of 10.3x might make it look like a strong sell right now compared to the Pharmaceuticals industry in the United States, where around half of the companies have P/S ratios below 3.3x and even P/S below 1x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Tarsus Pharmaceuticals

How Has Tarsus Pharmaceuticals Performed Recently?

Tarsus Pharmaceuticals certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. 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 Tarsus Pharmaceuticals' 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?

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

Retrospectively, the last year delivered an explosive gain to the company's top line. The amazing performance means it was also able to grow revenue by 221% 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.

Turning to the outlook, the next three years should generate growth of 57% each year as estimated by the seven analysts watching the company. That's shaping up to be materially higher than the 20% per annum growth forecast for the broader industry.

With this in mind, it's not hard to understand why Tarsus Pharmaceuticals' 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.

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

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 Tarsus Pharmaceuticals' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 1 warning sign for Tarsus Pharmaceuticals that you need to take into consideration.

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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