When close to half the companies in the Healthcare industry in the United States have price-to-sales ratios (or "P/S") below 1.2x, you may consider Fulgent Genetics, Inc. (NASDAQ:FLGT) as a stock to potentially avoid with its 2.2x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How Has Fulgent Genetics Performed Recently?

Fulgent Genetics 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. If not, then existing shareholders may be extremely nervous about the viability of the share price.

How Is Fulgent Genetics' Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 5.4% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 68% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 3.8% as estimated by the three analysts watching the company. With the industry predicted to deliver 7.7% growth, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Fulgent Genetics' P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.

What We Can Learn From Fulgent Genetics' P/S?

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.

We've concluded that Fulgent Genetics currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. 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.

Before you settle on your opinion, we've discovered 1 warning sign for Fulgent Genetics that you should be aware of.

If you're unsure about the strength of Fulgent Genetics' 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.