Fortrea Holdings Inc.'s (NASDAQ:FTRE) price-to-sales (or "P/S") ratio of 0.7x might make it look like a strong buy right now compared to the Life Sciences industry in the United States, where around half of the companies have P/S ratios above 3.9x and even P/S above 6x 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 Fortrea Holdings' P/S Mean For Shareholders?

Recent revenue growth for Fortrea Holdings has been in line with the industry. It might be that many expect the mediocre revenue performance to degrade, which has repressed the P/S ratio. Those who are bullish on Fortrea Holdings will be hoping that this isn't the case.

Do Revenue Forecasts Match The Low P/S Ratio?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 2.8% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 2.7% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 0.6% each year as estimated by the eleven analysts watching the company. With the industry predicted to deliver 7.3% growth each year, the company is positioned for a weaker revenue result.

In light of this, it's understandable that Fortrea Holdings' P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Fortrea Holdings' analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Fortrea Holdings, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Fortrea Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.