CytomX Therapeutics, Inc. (NASDAQ:CTMX) shares have continued their recent momentum with a 40% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 3.7% isn't as attractive.

Even after such a large jump in price, CytomX Therapeutics' price-to-sales (or "P/S") ratio of 1.6x 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 15.6x and even P/S above 73x 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 CytomX Therapeutics Has Been Performing

CytomX Therapeutics certainly has been doing a good job lately as it's been growing revenue more than most other companies. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

In order to justify its P/S ratio, CytomX Therapeutics would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered an explosive gain to the company's top line. Still, revenue has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Looking ahead now, revenue is anticipated to slump, contracting by 17% per year during the coming three years according to the five analysts following the company. That's not great when the rest of the industry is expected to grow by 296% per year.

In light of this, it's understandable that CytomX Therapeutics' P/S would sit below the majority of other companies. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On CytomX Therapeutics' P/S

Even after such a strong price move, CytomX Therapeutics' P/S still trails the rest of the industry. 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.

As we suspected, our examination of CytomX Therapeutics' analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, CytomX Therapeutics' poor outlook justifies its low P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware CytomX Therapeutics is showing 4 warning signs in our investment analysis, and 2 of those are significant.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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