Arcutis Biotherapeutics, Inc. (NASDAQ:ARQT) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month, although it is still struggling to make up recently lost ground. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

In spite of the firm bounce in price, it's still not a stretch to say that Arcutis Biotherapeutics' price-to-sales (or "P/S") ratio of 10.7x right now seems quite "middle-of-the-road" compared to the Biotechs industry in the United States, where the median P/S ratio is around 11.1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

How Has Arcutis Biotherapeutics Performed Recently?

With revenue growth that's superior to most other companies of late, Arcutis Biotherapeutics has been doing relatively well. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

How Is Arcutis Biotherapeutics' Revenue Growth Trending?

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

If we review the last year of revenue growth, we see the company's revenues grew exponentially. Still, revenue has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 61% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 199% per annum, which is noticeably more attractive.

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 Final Word

Its shares have lifted substantially and now Arcutis Biotherapeutics' P/S is back within range of the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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. 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You need to take note of risks, for example - Arcutis Biotherapeutics has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com