FARO Technologies, Inc. (NASDAQ:FARO) shares have continued their recent momentum with a 44% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 53%.

Although its price has surged higher, FARO Technologies' price-to-sales (or "P/S") ratio of 1.4x might still make it look like a buy right now compared to the Electronic industry in the United States, where around half of the companies have P/S ratios above 2.1x and even P/S above 5x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

How Has FARO Technologies Performed Recently?

FARO Technologies hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like FARO Technologies' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 4.4% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 5.2% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 0.7% over the next year. That's shaping up to be materially lower than the 8.9% growth forecast for the broader industry.

With this information, we can see why FARO Technologies is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

The latest share price surge wasn't enough to lift FARO Technologies' P/S close to the industry median. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of FARO Technologies' analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about this 1 warning sign we've spotted with FARO Technologies.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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