There's Reason For Concern Over Mercer International Inc.'s (NASDAQ:MERC) Price

With a median price-to-sales (or "P/S") ratio of close to 0.4x in the Forestry industry in the United States, you could be forgiven for feeling indifferent about Mercer International Inc.'s (NASDAQ:MERC) P/S ratio of 0.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Mercer International

What Does Mercer International's P/S Mean For Shareholders?

Mercer International has been doing a reasonable job lately as its revenue hasn't declined as much as most other companies. It might be that many expect the comparatively superior revenue performance to vanish, which has kept the P/S from rising. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. In saying that, existing shareholders probably aren't too pessimistic about the share price if the company's revenue continues outplaying the industry.

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

How Is Mercer International's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Mercer International's is when the company's growth is tracking the industry closely.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 8.4%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 36% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 1.2% over the next year. That's shaping up to be materially lower than the 4.3% growth forecast for the broader industry.

With this information, we find it interesting that Mercer International is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Mercer International's P/S?

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.

Given that Mercer International's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it 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. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Mercer International, and understanding these should be part of your investment process.

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

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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.

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