With a price-to-sales (or "P/S") ratio of 4x Veracyte, Inc. (NASDAQ:VCYT) may be sending very bullish signals at the moment, given that almost half of all the Biotechs companies in the United States have P/S ratios greater than 13x and even P/S higher than 64x are not unusual. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

What Does Veracyte's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Veracyte has been relatively sluggish. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. 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.

How Is Veracyte's Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 22% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 207% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 11% per year as estimated by the nine analysts watching the company. That's shaping up to be materially lower than the 165% each year growth forecast for the broader industry.

In light of this, it's understandable that Veracyte's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Veracyte maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. The company will need a change of fortune to justify the P/S rising higher in the future.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Veracyte you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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