Foghorn Therapeutics Inc. (NASDAQ:FHTX) shares have had a horrible month, losing 25% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 12% share price drop.

Since its price has dipped substantially, Foghorn Therapeutics may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 7x, since almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 12.4x and even P/S higher than 67x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

How Foghorn Therapeutics Has Been Performing

Foghorn Therapeutics could be doing better as it's been growing revenue less than most other companies lately. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

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

The only time you'd be truly comfortable seeing a P/S as low as Foghorn Therapeutics' is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered an exceptional 64% gain to the company's top line. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the six analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 210% per annum, which is noticeably more attractive.

With this information, we can see why Foghorn 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 Key Takeaway

The southerly movements of Foghorn Therapeutics' shares means its P/S is now sitting at a pretty low level. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Foghorn Therapeutics maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

It is also worth noting that we have found 4 warning signs for Foghorn Therapeutics (1 doesn't sit too well with us!) that you need to take into consideration.

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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