What Castle Biosciences, Inc.'s (NASDAQ:CSTL) 30% Share Price Gain Is Not Telling You

The Castle Biosciences, Inc. (NASDAQ:CSTL) share price has done very well over the last month, posting an excellent gain of 30%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 30% over that time.

Since its price has surged higher, you could be forgiven for thinking Castle Biosciences is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.7x, considering almost half the companies in the United States' Healthcare industry have P/S ratios below 1.2x. 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.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

See our latest analysis for Castle Biosciences

What Does Castle Biosciences' P/S Mean For Shareholders?

Castle Biosciences certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think Castle Biosciences' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For Castle Biosciences?

The only time you'd be truly comfortable seeing a P/S as high as Castle Biosciences' is when the company's growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 20%. The latest three year period has also seen an excellent 214% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 1.1% per year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 6.4% per annum, which is noticeably more attractive.

In light of this, it's alarming that Castle Biosciences' P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Castle Biosciences' P/S Mean For Investors?

Castle Biosciences shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

It comes as a surprise to see Castle Biosciences trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 3 warning signs for Castle Biosciences (1 shouldn't be ignored!) that you need to take into consideration.

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.

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.