Subdued Growth No Barrier To Realco SA (EBR:REAL) With Shares Advancing 32%

The Realco SA (EBR:REAL) share price has done very well over the last month, posting an excellent gain of 32%. The last 30 days bring the annual gain to a very sharp 42%.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Realco's P/S ratio of 1x, since the median price-to-sales (or "P/S") ratio for the Chemicals industry in Belgium is also close to 0.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

See our latest analysis for Realco

How Has Realco Performed Recently?

Revenue has risen at a steady rate over the last year for Realco, which is generally not a bad outcome. It might be that many expect the respectable revenue performance to only match most other companies over the coming period, which has kept the P/S from rising. If not, then at least existing shareholders probably aren't too pessimistic about the future direction of the share price.

Although there are no analyst estimates available for Realco, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

Realco's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.3% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 8.9% overall drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to shrink 0.2% in the next 12 months, the company's downward momentum is still inferior based on recent medium-term annualised revenue results.

In light of this, it's somewhat peculiar that Realco's P/S sits in line with the majority of other companies. In general, when revenue shrink rapidly the P/S often shrinks too, which could set up shareholders for future disappointment. There's potential for the P/S to fall to lower levels if the company doesn't improve its top-line growth, which would be difficult to do with the current industry outlook.

The Final Word

Realco's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Realco revealed its sharp three-year contraction in revenue isn't impacting its P/S as much as we would have predicted, given the industry is set to shrink less severely. When we see below average revenue, we suspect the share price is at risk of declining, sending the moderate P/S lower. We're also cautious about the company's ability to stay its recent medium-term course and resist even greater pain to its business from the broader industry turmoil. Unless the company's relative performance improves, it's challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 5 warning signs for Realco (3 are significant!) that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.