Investors Appear Satisfied With Eton Pharmaceuticals, Inc.'s (NASDAQ:ETON) Prospects As Shares Rocket 29%

Despite an already strong run, Eton Pharmaceuticals, Inc. (NASDAQ:ETON) shares have been powering on, with a gain of 29% in the last thirty days. The annual gain comes to 187% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given around half the companies in the United States' Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 2.7x, you may consider Eton Pharmaceuticals as a stock to avoid entirely with its 8.7x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Eton Pharmaceuticals

How Eton Pharmaceuticals Has Been Performing

With revenue growth that's inferior to most other companies of late, Eton Pharmaceuticals has been relatively sluggish. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

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

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

The only time you'd be truly comfortable seeing a P/S as steep as Eton Pharmaceuticals' is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a worthy increase of 8.1%. This was backed up an excellent period prior to see revenue up by 111% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 50% per annum during the coming three years according to the dual analysts following the company. With the industry only predicted to deliver 20% per annum, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Eton Pharmaceuticals' P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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

The strong share price surge has lead to Eton Pharmaceuticals' P/S soaring as well. 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 into Eton Pharmaceuticals shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Eton Pharmaceuticals with six simple checks on some of these key factors.

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.