Lacklustre Performance Is Driving Formosa Chemicals & Fibre Corporation's (TWSE:1326) Low P/S

With a price-to-sales (or "P/S") ratio of 0.5x Formosa Chemicals & Fibre Corporation (TWSE:1326) may be sending bullish signals at the moment, given that almost half of all the Chemicals companies in Taiwan have P/S ratios greater than 1.7x and even P/S higher than 4x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Formosa Chemicals & Fibre

What Does Formosa Chemicals & Fibre's P/S Mean For Shareholders?

Recent revenue growth for Formosa Chemicals & Fibre has been in line with the industry. One possibility is that the P/S ratio is low because investors think this modest revenue performance may begin to slide. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

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

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

There's an inherent assumption that a company should underperform the industry for P/S ratios like Formosa Chemicals & Fibre's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 7.2%. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 1.2% as estimated by the nine analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 8.4%, which is noticeably more attractive.

With this information, we can see why Formosa Chemicals & Fibre is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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.

As expected, our analysis of Formosa Chemicals & Fibre's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Formosa Chemicals & Fibre that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.