The Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX) share price has fared very poorly over the last month, falling by a substantial 50%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 82% loss during that time.

Since its price has dipped substantially, Lexicon Pharmaceuticals' price-to-sales (or "P/S") ratio of 4.2x might make it look like a strong buy right now compared to the wider Biotechs industry in the United States, where around half of the companies have P/S ratios above 9x and even P/S above 52x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

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See our latest analysis for Lexicon Pharmaceuticals

What Does Lexicon Pharmaceuticals' P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Lexicon Pharmaceuticals has been doing relatively well. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Lexicon Pharmaceuticals.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

Lexicon Pharmaceuticals' P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

If we review the last year of revenue growth, we see the company's revenues grew exponentially. 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 1.0% each year as estimated by the six analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 141% each year, which is noticeably more attractive.

In light of this, it's understandable that Lexicon Pharmaceuticals' 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.

What We Can Learn From Lexicon Pharmaceuticals' P/S?

Shares in Lexicon Pharmaceuticals have plummeted and its P/S has followed suit. 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 expected, our analysis of Lexicon Pharmaceuticals' analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor 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. 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 3 warning signs with Lexicon Pharmaceuticals (at least 2 which make us uncomfortable), and understanding these should be part of your investment process.

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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