Caesarstone Ltd. (NASDAQ:CSTE) Looks Inexpensive After Falling 27% But Perhaps Not Attractive Enough

To the annoyance of some shareholders, Caesarstone Ltd. (NASDAQ:CSTE) shares are down a considerable 27% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 65% share price decline.

Following the heavy fall in price, Caesarstone's price-to-sales (or "P/S") ratio of 0.2x might make it look like a buy right now compared to the Building industry in the United States, where around half of the companies have P/S ratios above 1.6x and even P/S above 4x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for Caesarstone

What Does Caesarstone's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Caesarstone's revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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

Do Revenue Forecasts Match The Low P/S Ratio?

Caesarstone's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 20%. The last three years don't look nice either as the company has shrunk revenue by 36% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 2.9% during the coming year according to the sole analyst following the company. With the industry predicted to deliver 5.0% growth, the company is positioned for a weaker revenue result.

With this information, we can see why Caesarstone 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.

What Does Caesarstone's P/S Mean For Investors?

The southerly movements of Caesarstone's shares means its P/S is now sitting at a pretty low level. 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.

As expected, our analysis of Caesarstone's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 2 warning signs for Caesarstone (1 is a bit unpleasant!) that we have uncovered.

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.