What You Can Learn From Formosa Plastics Corporation's (TWSE:1301) P/S

With a median price-to-sales (or "P/S") ratio of close to 1.8x in the Chemicals industry in Taiwan, you could be forgiven for feeling indifferent about Formosa Plastics Corporation's (TWSE:1301) P/S ratio of 2.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Formosa Plastics

How Formosa Plastics Has Been Performing

Recent times haven't been great for Formosa Plastics as its revenue has been falling quicker than most other companies. One possibility is that the P/S is moderate because investors think the company's revenue trend will eventually fall in line with most others in the industry. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. 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.

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

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Formosa Plastics' 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 26%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 13% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 6.6% as estimated by the eight analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 7.1%, which is not materially different.

With this in mind, it makes sense that Formosa Plastics' 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.

What Does Formosa Plastics' P/S Mean For Investors?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look at Formosa Plastics' revenue growth estimates show that its P/S is about what we expect, as both metrics follow closely with the industry averages. 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. Unless these conditions change, they will continue to support the share price at these levels.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Formosa Plastics (1 makes us a bit uncomfortable) 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.