Foghorn Therapeutics Inc.'s (NASDAQ:FHTX) Shares May Have Run Too Fast Too Soon

With a price-to-sales (or "P/S") ratio of 13.1x Foghorn Therapeutics Inc. (NASDAQ:FHTX) may be sending very bearish signals at the moment, given that almost half of all the Biotechs companies in the United States have P/S ratios under 8.6x and even P/S lower than 3x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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Check out our latest analysis for Foghorn Therapeutics

How Foghorn Therapeutics Has Been Performing

Foghorn Therapeutics could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

In order to justify its P/S ratio, Foghorn Therapeutics would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 31%. In spite of this, the company still managed to deliver immense revenue growth over the last three years. So while the company has done a great job in the past, it's somewhat concerning to see revenue growth decline so harshly.

Looking ahead now, revenue is anticipated to climb by 23% per year during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 104% per annum, which is noticeably more attractive.

With this information, we find it concerning that Foghorn Therapeutics is trading at a P/S higher than the industry. 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.

The Final Word

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.

It comes as a surprise to see Foghorn 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Foghorn Therapeutics (at least 1 which is a bit unpleasant), and understanding these should be part of your investment process.

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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.