Some Confidence Is Lacking In Privi Speciality Chemicals Limited's (NSE:PRIVISCL) P/S

When close to half the companies in the Chemicals industry in India have price-to-sales ratios (or "P/S") below 1.9x, you may consider Privi Speciality Chemicals Limited (NSE:PRIVISCL) as a stock to potentially avoid with its 3.5x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Privi Speciality Chemicals

What Does Privi Speciality Chemicals' Recent Performance Look Like?

Recent times have been advantageous for Privi Speciality Chemicals as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Privi Speciality Chemicals will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Privi Speciality Chemicals?

The only time you'd be truly comfortable seeing a P/S as high as Privi Speciality Chemicals' is when the company's growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 11%. The latest three year period has also seen an excellent 37% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 13% over the next year. With the industry predicted to deliver 16% growth, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Privi Speciality Chemicals' P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 growth outlook.

The Bottom Line On Privi Speciality Chemicals' 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 comes as a surprise to see Privi Speciality Chemicals trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with Privi Speciality Chemicals.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.