Wave Life Sciences Ltd. (NASDAQ:WVE) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month, although it is still struggling to make up recently lost ground. Looking further back, the 22% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, Wave Life Sciences' price-to-sales (or "P/S") ratio of 7.3x might make it look like a strong sell right now compared to other companies in the Pharmaceuticals industry in the United States, where around half of the companies have P/S ratios below 3.1x and even P/S below 0.6x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Wave Life Sciences' P/S Mean For Shareholders?

Recent times have been advantageous for Wave Life Sciences 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.

Do Revenue Forecasts Match The High P/S Ratio?

Wave Life Sciences' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months. The amazing performance means it was also able to deliver huge revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 12% per annum as estimated by the six analysts watching the company. Meanwhile, the broader industry is forecast to expand by 46% per year, which paints a poor picture.

In light of this, it's alarming that Wave Life Sciences' P/S sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh heavily on the share price eventually.

The Final Word

The strong share price surge has lead to Wave Life Sciences' P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

For a company with revenues that are set to decline in the context of a growing industry, Wave Life Sciences' P/S is much higher than we would've anticipated. In cases like this where we see revenue decline on the horizon, we suspect the share price is at risk of following suit, bringing back the high P/S into the realms of suitability. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Wave Life Sciences (1 is a bit unpleasant) you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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