The Arcellx, Inc. (NASDAQ:ACLX) share price has done very well over the last month, posting an excellent gain of 28%. The last 30 days bring the annual gain to a very sharp 77%.

Since its price has surged higher, Arcellx's price-to-sales (or "P/S") ratio of 24.3x might make it look like a strong sell right now compared to other companies in the Biotechs industry in the United States, where around half of the companies have P/S ratios below 11.9x and even P/S below 4x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

What Does Arcellx's P/S Mean For Shareholders?

Arcellx certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Arcellx's Revenue Growth Trending?

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

If we review the last year of revenue growth, we see the company's revenues grew exponentially. In spite of this unbelievable short-term growth, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 3.1% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 138% per annum, which is noticeably more attractive.

In light of this, it's alarming that Arcellx's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Arcellx's P/S

The strong share price surge has lead to Arcellx's P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It comes as a surprise to see Arcellx trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for Arcellx you should be aware of, and 1 of them doesn't sit too well with us.

If you're unsure about the strength of Arcellx's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.