Slammed 25% Elementis plc (LON:ELM) Screens Well Here But There Might Be A Catch

Elementis plc (LON:ELM) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 22% in that time.

Although its price has dipped substantially, there still wouldn't be many who think Elementis' price-to-sales (or "P/S") ratio of 1.2x is worth a mention when it essentially matches the median P/S in the United Kingdom's Chemicals industry. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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View our latest analysis for Elementis

What Does Elementis' Recent Performance Look Like?

With its revenue growth in positive territory compared to the declining revenue of most other companies, Elementis has been doing quite well of late. Perhaps the market is expecting its current strong performance to taper off in accordance to the rest of the industry, which has kept the P/S contained. 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 Elementis .

Do Revenue Forecasts Match The P/S Ratio?

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

If we review the last year of revenue growth, the company posted a worthy increase of 3.5%. Still, revenue has barely risen at all in aggregate from three years ago, which is not ideal. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should demonstrate some strength in company's business, generating growth of 3.3% per year as estimated by the seven analysts watching the company. This isn't typically strong growth, but with the rest of the industry predicted to shrink by 2.1% per annum, that would be a solid result.

Despite the marginal growth, we find it odd that Elementis is trading at a fairly similar P/S to the industry. It looks like most investors aren't convinced the company can achieve positive future growth in the face of a shrinking broader industry.

What Does Elementis' P/S Mean For Investors?

Following Elementis' share price tumble, its P/S is just clinging on to the industry median P/S. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Elementis' analyst forecasts revealed that its superior revenue outlook against a shaky industry isn't resulting in the company trading at a higher P/S, as per our expectations. Given the glowing revenue forecasts, we can only assume potential risks are what might be capping the P/S ratio at its current levels. Perhaps there is some hesitation about the company's ability to keep swimming against the current of the broader industry turmoil. It appears some are indeed anticipating revenue instability, because the company's current prospects should normally provide a boost to the share price.

You always need to take note of risks, for example - Elementis has 1 warning sign we think you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.