Stock Analysis

Kropz plc (LON:KRPZ) Screens Well But There Might Be A Catch

AIM:KRPZ
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With a median price-to-sales (or "P/S") ratio of close to 1.2x in the Chemicals industry in the United Kingdom, you could be forgiven for feeling indifferent about Kropz plc's (LON:KRPZ) P/S ratio of 1x. 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 Kropz

ps-multiple-vs-industry
AIM:KRPZ Price to Sales Ratio vs Industry January 3rd 2025

How Kropz Has Been Performing

The revenue growth achieved at Kropz over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. Those who are bullish on Kropz will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Kropz will help you shine a light on its historical performance.

Do Revenue Forecasts Match The P/S Ratio?

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

Taking a look back first, we see that the company grew revenue by an impressive 28% last year. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to decline by 13% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

With this in mind, we find it intriguing that Kropz's P/S matches its industry peers. It looks like most investors are not convinced the company can maintain its recent positive growth rate in the face of a shrinking broader industry.

The Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Kropz revealed its growing revenue over the medium-term hasn't helped elevate its P/S above that of the industry, which is surprising given the industry is set to shrink. There could be some unobserved threats to revenue preventing the P/S ratio from outpacing the industry much like its revenue performance. One major risk is whether its revenue trajectory can keep outperforming under these tough industry conditions. It appears some are indeed anticipating revenue instability, because this relative performance should normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Kropz (3 are a bit concerning) you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Valuation is complex, but we're here to simplify it.

Discover if Kropz might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.