What Grupa Azoty S.A.'s (WSE:ATT) 29% Share Price Gain Is Not Telling You

Grupa Azoty S.A. (WSE:ATT) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 6.3% isn't as impressive.

In spite of the firm bounce in price, there still wouldn't be many who think Grupa Azoty's price-to-sales (or "P/S") ratio of 0.2x is worth a mention when the median P/S in Poland's Chemicals industry is similar at about 0.5x. 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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What Does Grupa Azoty's Recent Performance Look Like?

Recent times have been more advantageous for Grupa Azoty as its revenue hasn't fallen as much as the rest of the industry. One possibility is that the P/S ratio is moderate because investors think this relatively better revenue performance might be about to evaporate. You'd much rather the company continue improving its revenue if you still believe in the business. But at the very least, you'd be hoping the company doesn't fall back into the pack if your plan is to pick up some stock while it's not in favour.

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

Do Revenue Forecasts Match The P/S Ratio?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 3.7%. This means it has also seen a slide in revenue over the longer-term as revenue is down 18% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 3.0% each year during the coming three years according to the four analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 10% per annum, which is noticeably more attractive.

With this information, we find it interesting that Grupa Azoty is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now Grupa Azoty's P/S is back within range of the industry median. 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.

Our look at the analysts forecasts of Grupa Azoty's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Grupa Azoty with six simple checks.

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.