Teraplast S.A. (BVB:TRP) Soars 33% But It's A Story Of Risk Vs Reward

Teraplast S.A. (BVB:TRP) shares have had a really impressive month, gaining 33% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.1% in the last twelve months.

Although its price has surged higher, there still wouldn't be many who think Teraplast's price-to-sales (or "P/S") ratio of 1.2x is worth a mention when the median P/S in Romania's Chemicals industry is similar at about 1.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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What Does Teraplast's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Teraplast has been doing relatively well. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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How Is Teraplast's Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 40% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 45% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 11% per year during the coming three years according to the sole analyst following the company. Meanwhile, the rest of the industry is forecast to only expand by 8.4% per year, which is noticeably less attractive.

With this in consideration, we find it intriguing that Teraplast's P/S is closely matching its industry peers. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Bottom Line On Teraplast's P/S

Teraplast appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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 established that Teraplast currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. Perhaps uncertainty in the revenue forecasts are what's keeping the P/S ratio consistent with the rest of the industry. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

You always need to take note of risks, for example - Teraplast has 2 warning signs we think 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.

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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.