There's Reason For Concern Over Arcutis Biotherapeutics, Inc.'s (NASDAQ:ARQT) Massive 32% Price Jump

Arcutis Biotherapeutics, Inc. (NASDAQ:ARQT) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. The last 30 days were the cherry on top of the stock's 464% gain in the last year, which is nothing short of spectacular.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Arcutis Biotherapeutics' P/S ratio of 9.7x, since the median price-to-sales (or "P/S") ratio for the Biotechs industry in the United States is also close to 9.9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Arcutis Biotherapeutics

How Arcutis Biotherapeutics Has Been Performing

Arcutis Biotherapeutics could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Arcutis Biotherapeutics.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Arcutis Biotherapeutics' is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a terrific increase of 183%. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 56% per annum over the next three years. With the industry predicted to deliver 118% growth per year, the company is positioned for a weaker revenue result.

In light of this, it's curious that Arcutis Biotherapeutics' P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Arcutis Biotherapeutics appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

Our look at the analysts forecasts of Arcutis Biotherapeutics' revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Before you settle on your opinion, we've discovered 2 warning signs for Arcutis Biotherapeutics that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.