CRISPR Therapeutics AG's (NASDAQ:CRSP) price-to-sales (or "P/S") ratio of 16.7x might make it look like a sell right now compared to the Biotechs industry in the United States, where around half of the companies have P/S ratios below 13.4x and even P/S below 5x 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 CRISPR Therapeutics' P/S Mean For Shareholders?

Recent times have been advantageous for CRISPR Therapeutics as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

There's an inherent assumption that a company should outperform the industry for P/S ratios like CRISPR Therapeutics' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 171%. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 58% per annum over the next three years. That's shaping up to be materially lower than the 150% per year growth forecast for the broader industry.

In light of this, it's alarming that CRISPR Therapeutics' 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does CRISPR Therapeutics' P/S Mean For Investors?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It comes as a surprise to see CRISPR Therapeutics trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for CRISPR Therapeutics you should know about.

If you're unsure about the strength of CRISPR Therapeutics' 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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