Saudi Basic Industries Corporation's (TADAWUL:2010) P/S Still Appears To Be Reasonable

There wouldn't be many who think Saudi Basic Industries Corporation's (TADAWUL:2010) price-to-sales (or "P/S") ratio of 1.5x is worth a mention when the median P/S for the Chemicals industry in Saudi Arabia is similar at about 1.9x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Saudi Basic Industries

How Has Saudi Basic Industries Performed Recently?

Recent times haven't been great for Saudi Basic Industries as its revenue has been falling quicker than most other companies. Perhaps the market is expecting future revenue performance to begin matching the rest of the industry, which has kept the P/S from declining. You'd much rather the company improve its revenue if you still believe in the business. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

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

How Is Saudi Basic Industries' Revenue Growth Trending?

In order to justify its P/S ratio, Saudi Basic Industries would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 3.9% decrease to the company's top line. As a result, revenue from three years ago have also fallen 10% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 5.5% per annum as estimated by the ten analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 4.4% each year, which is not materially different.

With this in mind, it makes sense that Saudi Basic Industries' P/S is closely matching its industry peers. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Bottom Line On Saudi Basic Industries' P/S

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

A Saudi Basic Industries' P/S seems about right to us given the knowledge that analysts are forecasting a revenue outlook that is similar to the Chemicals industry. At this stage investors feel the potential for an improvement or deterioration in revenue isn't great enough to push P/S in a higher or lower direction. If all things remain constant, the possibility of a drastic share price movement remains fairly remote.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Saudi Basic Industries (1 is concerning) you should be aware of.

If you're unsure about the strength of Saudi Basic Industries' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.