Despite an already strong run, Foghorn Therapeutics Inc. (NASDAQ:FHTX) shares have been powering on, with a gain of 28% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 13% is also fairly reasonable.

Although its price has surged higher, there still wouldn't be many who think Foghorn Therapeutics' price-to-sales (or "P/S") ratio of 12.6x is worth a mention when the median P/S in the United States' Biotechs industry is similar at about 12.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

How Foghorn Therapeutics Has Been Performing

Foghorn Therapeutics could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

In order to justify its P/S ratio, Foghorn Therapeutics would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company grew revenue by an impressive 62% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 16% per annum during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 139% per annum, which is noticeably more attractive.

In light of this, it's curious that Foghorn Therapeutics' P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Foghorn Therapeutics appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look at the analysts forecasts of Foghorn Therapeutics' revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Foghorn Therapeutics (1 is concerning) you should be aware of.

If you're unsure about the strength of Foghorn Therapeutics' 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.