DSM-Firmenich AG's (AMS:DSFIR) Share Price Could Signal Some Risk

When you see that almost half of the companies in the Chemicals industry in the Netherlands have price-to-sales ratios (or "P/S") below 0.8x, DSM-Firmenich AG (AMS:DSFIR) looks to be giving off strong sell signals with its 2.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for DSM-Firmenich

What Does DSM-Firmenich's Recent Performance Look Like?

Recent times have been advantageous for DSM-Firmenich as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is DSM-Firmenich's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like DSM-Firmenich's to be considered reasonable.

Retrospectively, the last year delivered a decent 11% gain to the company's revenues. The latest three year period has also seen a 8.8% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 16% each year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 34% each year growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that DSM-Firmenich's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 DSM-Firmenich's P/S

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've concluded that DSM-Firmenich currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 1 warning sign for DSM-Firmenich that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.