Veracyte, Inc.'s (NASDAQ:VCYT) price-to-sales (or "P/S") ratio of 5.1x might make it look like a strong buy right now compared to the Biotechs industry in the United States, where around half of the companies have P/S ratios above 11.8x and even P/S above 67x are quite common. 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 P/S Mean For Shareholders?

Veracyte could be doing better as it's been growing revenue less than most other companies lately. 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.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Veracyte would need to produce anemic growth that's substantially trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 21% last year. The latest three year period has also seen an excellent 205% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 11% over the next year. That's shaping up to be materially lower than the 312% 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

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.

As expected, our analysis of Veracyte's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Veracyte is showing 1 warning sign in our investment analysis, 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com