What Arcus Biosciences, Inc.'s (NYSE:RCUS) 27% Share Price Gain Is Not Telling You

Arcus Biosciences, Inc. (NYSE:RCUS) shares have continued their recent momentum with a 27% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 5.4% isn't as impressive.

Even after such a large jump in price, there still wouldn't be many who think Arcus Biosciences' price-to-sales (or "P/S") ratio of 15.3x is worth a mention when the median P/S in the United States' Biotechs industry is similar at about 14.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Arcus Biosciences

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

Recent times haven't been great for Arcus Biosciences as its revenue has been rising slower than most other companies. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. If not, then existing shareholders may be a little 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 Arcus Biosciences.

How Is Arcus Biosciences' Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Arcus Biosciences' to be considered reasonable.

Retrospectively, the last year delivered a decent 4.5% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 50% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 6.3% per year over the next three years. That's shaping up to be materially lower than the 271% each year growth forecast for the broader industry.

With this in mind, we find it intriguing that Arcus Biosciences' P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On Arcus Biosciences' P/S

Its shares have lifted substantially and now Arcus Biosciences' P/S is back within range of the industry median. 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.

Our look at the analysts forecasts of Arcus Biosciences' revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Arcus Biosciences that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.