Investors Don't See Light At End Of Valhi, Inc.'s (NYSE:VHI) Tunnel And Push Stock Down 28%

Valhi, Inc. (NYSE:VHI) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. The good news is that in the last year, the stock has shone bright like a diamond, gaining 102%.

After such a large drop in price, considering around half the companies operating in the United States' Chemicals industry have price-to-sales ratios (or "P/S") above 1.4x, you may consider Valhi as an solid investment opportunity with its 0.4x P/S ratio. 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 Valhi

What Does Valhi's P/S Mean For Shareholders?

The revenue growth achieved at Valhi over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Valhi will help you shine a light on its historical performance.

Is There Any Revenue Growth Forecasted For Valhi?

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

If we review the last year of revenue growth, the company posted a worthy increase of 11%. Still, lamentably revenue has fallen 2.5% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 3.0% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's understandable that Valhi's P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Valhi's P/S

Valhi's recently weak share price has pulled its P/S back below other Chemicals companies. 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.

As we suspected, our examination of Valhi revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Valhi (at least 1 which makes us a bit uncomfortable), and understanding these should be part of your investment process.

If you're unsure about the strength of Valhi'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.