Why Investors Shouldn't Be Surprised By Neochim AD's (BUL:NEOH) Low P/S

You may think that with a price-to-sales (or "P/S") ratio of 0.2x Neochim AD (BUL:NEOH) is a stock worth checking out, seeing as almost half of all the Chemicals companies in Bulgaria have P/S ratios greater than 1x and even P/S higher than 3x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for Neochim AD

How Has Neochim AD Performed Recently?

Revenue has risen firmly for Neochim AD recently, which is pleasing to see. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. 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.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Neochim AD's earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Neochim AD?

Neochim AD's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a decent 11% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 49% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

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.

With this information, it's not too hard to see why Neochim AD is trading at a lower P/S in comparison. Nonetheless, with revenue going quickly in reverse, it's not guaranteed that the P/S has found a floor yet. Even just maintaining these prices will be difficult to achieve as recent revenue trends are already weighing down the shares heavily.

What We Can Learn From Neochim AD's P/S?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

It's clear that Neochim AD trades at a low P/S relative to the wider industry on the weakness of its recent three-year revenue being even worse than the forecasts for a struggling industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. However, we're still cautious about the company's ability to prevent an acceleration of its recent medium-term course and resist even greater pain to its business from the broader industry turmoil. For now though, it's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Neochim AD is showing 3 warning signs in our investment analysis, and 2 of those are a bit unpleasant.

If you're unsure about the strength of Neochim AD'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.