Some Confidence Is Lacking In Formycon AG's (ETR:FYB) P/S

With a price-to-sales (or "P/S") ratio of 11.4x Formycon AG (ETR:FYB) may be sending bearish signals at the moment, given that almost half of all Biotechs companies in Germany have P/S ratios under 7.6x and even P/S lower than 1.5x are not unusual. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Formycon

What Does Formycon's Recent Performance Look Like?

Recent times have been advantageous for Formycon 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Formycon.

Is There Enough Revenue Growth Forecasted For Formycon?

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

Retrospectively, the last year delivered an exceptional 101% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 112% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 15% per year over the next three years. That's shaping up to be materially lower than the 77% per annum growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Formycon's P/S is outpacing its industry peers. 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 Formycon's P/S

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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Formycon, this doesn't appear to be impacting the P/S in the slightest. 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with Formycon.

If you're unsure about the strength of Formycon'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.