Saudi Ceramic Company (TADAWUL:2040) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

Saudi Ceramic Company (TADAWUL:2040) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 42%.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Saudi Ceramic's P/S ratio of 2.4x, since the median price-to-sales (or "P/S") ratio for the Building industry in Saudi Arabia is about the same. 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.

See our latest analysis for Saudi Ceramic

What Does Saudi Ceramic's P/S Mean For Shareholders?

Saudi Ceramic's negative revenue growth of late has neither been better nor worse than most other companies. It seems that few are expecting the company's revenue performance to deviate much from most other companies, which has held the P/S back. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. In saying that, existing shareholders probably aren't too pessimistic about the share price if the company's revenue continues tracking the industry.

Keen to find out how analysts think Saudi Ceramic's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The P/S?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.2%. This means it has also seen a slide in revenue over the longer-term as revenue is down 14% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 4.0% as estimated by the dual analysts watching the company. That's shaping up to be materially lower than the 9.6% growth forecast for the broader industry.

With this information, we find it interesting that Saudi Ceramic 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. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Saudi Ceramic's P/S?

Its shares have lifted substantially and now Saudi Ceramic'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.

Given that Saudi Ceramic's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for Saudi Ceramic 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.