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. Unfortunately, despite the strong performance over the last month, the full year gain of 8.3% isn't as attractive.

Although its price has surged higher, Foghorn Therapeutics may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 8.7x, considering almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 13.9x and even P/S higher than 61x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

How Has Foghorn Therapeutics Performed Recently?

Foghorn Therapeutics certainly has been doing a good job lately as it's been growing revenue more than most other companies. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Is There Any Revenue Growth Forecasted For Foghorn Therapeutics?

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

Taking a look back first, we see that the company grew revenue by an impressive 107% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 22% each year as estimated by the four analysts watching the company. With the industry predicted to deliver 250% growth each year, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Foghorn Therapeutics' P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

The latest share price surge wasn't enough to lift Foghorn Therapeutics' P/S close to the industry median. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Foghorn Therapeutics 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Foghorn Therapeutics is showing 3 warning signs in our investment analysis, and 2 of those are potentially serious.

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.