There's Reason For Concern Over Saudi Ceramic Company's (TADAWUL:2040) Price

With a median price-to-sales (or "P/S") ratio of close to 2.5x in the Building industry in Saudi Arabia, you could be forgiven for feeling indifferent about Saudi Ceramic Company's (TADAWUL:2040) P/S ratio of 2.7x. 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.

View our latest analysis for Saudi Ceramic

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

Saudi Ceramic certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. One possibility is that the P/S ratio is moderate because investors think the company's revenue will be less resilient moving forward. Those who are bullish on Saudi Ceramic will be hoping that this isn't the case, so that they can pick up the stock at a slightly lower valuation.

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

Is There Some Revenue Growth Forecasted For Saudi Ceramic?

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.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 12% overall from three years ago. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 4.9% over the next year. With the industry predicted to deliver 9.8% growth, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Saudi Ceramic's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. 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

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

When you consider that Saudi Ceramic's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. 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. A positive change is needed in order to justify the current price-to-sales ratio.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Saudi Ceramic you should know about.

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.