More Unpleasant Surprises Could Be In Store For Perimeter Solutions, Inc.'s (NYSE:PRM) Shares After Tumbling 26%

The Perimeter Solutions, Inc. (NYSE:PRM) share price has fared very poorly over the last month, falling by a substantial 26%. Still, a bad month hasn't completely ruined the past year with the stock gaining 72%, which is great even in a bull market.

Although its price has dipped substantially, given close to half the companies operating in the United States' Chemicals industry have price-to-sales ratios (or "P/S") below 1.2x, you may still consider Perimeter Solutions as a stock to potentially avoid with its 2.6x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Perimeter Solutions

How Has Perimeter Solutions Performed Recently?

Recent times have been advantageous for Perimeter Solutions as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

How Is Perimeter Solutions' Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Perimeter Solutions' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 74% last year. Pleasingly, revenue has also lifted 55% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 1.3% per annum over the next three years. With the industry predicted to deliver 4.6% growth per annum, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Perimeter Solutions' P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Perimeter Solutions' P/S

Despite the recent share price weakness, Perimeter Solutions' P/S remains higher than most other companies in the industry. 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.

We've concluded that Perimeter Solutions currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. At these price levels, investors should remain cautious, particularly if things don't improve.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Perimeter Solutions with six simple checks.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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.