Eton Pharmaceuticals, Inc. (NASDAQ:ETON) shareholders have had their patience rewarded with a 28% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.8% in the last twelve months.

After such a large jump in price, Eton Pharmaceuticals' price-to-sales (or "P/S") ratio of 3.7x might make it look like a sell right now compared to the wider Pharmaceuticals industry in the United States, where around half of the companies have P/S ratios below 3.1x and even P/S below 0.9x are quite common. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Eton Pharmaceuticals' Recent Performance Look Like?

Recent times haven't been great for Eton Pharmaceuticals as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For Eton Pharmaceuticals?

Eton Pharmaceuticals' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 8.1% last year. Pleasingly, revenue has also lifted 111% in aggregate from three years ago, partly thanks to the last 12 months of growth. 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 34% during the coming year according to the lone analyst following the company. With the industry only predicted to deliver 19%, the company is positioned for a stronger revenue result.

With this information, we can see why Eton Pharmaceuticals is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Eton Pharmaceuticals' P/S Mean For Investors?

Eton Pharmaceuticals' P/S is on the rise since its shares have risen strongly. 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.

As we suspected, our examination of Eton Pharmaceuticals' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Eton Pharmaceuticals with six simple checks.

If these risks are making you reconsider your opinion on Eton Pharmaceuticals, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.