Risks To Shareholder Returns Are Elevated At These Prices For Solvay SA (EBR:SOLB)

It's not a stretch to say that Solvay SA's (EBR:SOLB) price-to-sales (or "P/S") ratio of 0.6x right now seems quite "middle-of-the-road" for companies in the Chemicals industry in Belgium, where the median P/S ratio is around 0.7x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Solvay

What Does Solvay's Recent Performance Look Like?

Solvay certainly has been doing a good job lately as it's been growing revenue more than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. 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 not quite in favour.

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

Is There Some Revenue Growth Forecasted For Solvay?

The only time you'd be comfortable seeing a P/S like Solvay's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered an explosive gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 51% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to slump, contracting by 0.9% per annum during the coming three years according to the eleven analysts following the company. With the industry predicted to deliver 12% growth per year, that's a disappointing outcome.

In light of this, it's somewhat alarming that Solvay's P/S sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

What We Can Learn From Solvay's P/S?

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.

While Solvay's P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

Before you take the next step, you should know about the 2 warning signs for Solvay (1 is a bit concerning!) that we have uncovered.

If these risks are making you reconsider your opinion on Solvay, 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.