There's Reason For Concern Over Perimeter Solutions, Inc.'s (NYSE:PRM) Massive 26% Price Jump

Despite an already strong run, Perimeter Solutions, Inc. (NYSE:PRM) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days bring the annual gain to a very sharp 86%.

Since its price has surged higher, given around half the companies in the United States' Chemicals industry have price-to-sales ratios (or "P/S") below 1.2x, you may consider Perimeter Solutions as a stock to avoid entirely with its 5.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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Check out our latest analysis for Perimeter Solutions

What Does Perimeter Solutions' P/S Mean For Shareholders?

Perimeter Solutions certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 57% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 52% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 7.7% as estimated by the two analysts watching the company. With the industry predicted to deliver 11% growth, that's a disappointing outcome.

With this in mind, we find it intriguing that Perimeter Solutions' P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh heavily on the share price eventually.

What We Can Learn From Perimeter Solutions' P/S?

Shares in Perimeter Solutions have seen a strong upwards swing lately, which has really helped boost its P/S figure. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Perimeter Solutions' analyst forecasts revealed that its shrinking revenue outlook isn't drawing down its high P/S anywhere near as much as we would have predicted. Right now we aren't comfortable with the high P/S as the predicted future revenue decline likely to impact the positive sentiment that's propping up the P/S. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Perimeter Solutions you should know about.

If these risks are making you reconsider your opinion on Perimeter Solutions, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.