Despite an already strong run, G1 Therapeutics, Inc. (NASDAQ:GTHX) shares have been powering on, with a gain of 40% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 29% in the last year.

Even after such a large jump in price, G1 Therapeutics' price-to-sales (or "P/S") ratio of 3x might still make it look like a strong buy right now compared to the wider Biotechs industry in the United States, where around half of the companies have P/S ratios above 14.3x and even P/S above 61x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

How Has G1 Therapeutics Performed Recently?

G1 Therapeutics certainly has been doing a good job lately as it's been growing revenue more than most other companies. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. 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 out of favour.

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

There's an inherent assumption that a company should far underperform the industry for P/S ratios like G1 Therapeutics' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 66%. The strong recent performance means it was also able to grow revenue by 171% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 27% per year as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 251% each year growth forecast for the broader industry.

With this information, we can see why G1 Therapeutics is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Even after such a strong price move, G1 Therapeutics' P/S still trails the rest of the industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that G1 Therapeutics maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.

Having said that, be aware G1 Therapeutics is showing 3 warning signs in our investment analysis, and 1 of those can't be ignored.

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.