Prenetics Global Limited (NASDAQ:PRE) shareholders that were waiting for something to happen have been dealt a blow with a 36% share price drop in the last month. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 73% loss during that time.

In spite of the heavy fall in price, you could still be forgiven for thinking Prenetics Global is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2x, considering almost half the companies in the United States' Healthcare industry have P/S ratios below 1.1x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Prenetics Global's P/S Mean For Shareholders?

Prenetics Global 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. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Prenetics Global's is when the company's growth is on track to outshine the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 92%. The last three years don't look nice either as the company has shrunk revenue by 67% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 62% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 8.1%, which is noticeably less attractive.

With this information, we can see why Prenetics Global is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

There's still some elevation in Prenetics Global's P/S, even if the same can't be said for its share price recently. 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 Prenetics Global maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Healthcare industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Prenetics Global is showing 4 warning signs in our investment analysis, you should know about.

If you're unsure about the strength of Prenetics Global's 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.