Worthington Steel, Inc. (NYSE:WS) Looks Inexpensive But Perhaps Not Attractive Enough

You may think that with a price-to-sales (or "P/S") ratio of 0.5x Worthington Steel, Inc. (NYSE:WS) is a stock worth checking out, seeing as almost half of all the Metals and Mining companies in the United States have P/S ratios greater than 1.3x and even P/S higher than 4x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for Worthington Steel

What Does Worthington Steel's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Worthington Steel's revenue has gone into reverse gear, which is not great. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Worthington Steel would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 8.6% decrease to the company's top line. Still, the latest three year period has seen an excellent 60% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 4.8% each year as estimated by the dual analysts watching the company. That's not great when the rest of the industry is expected to grow by 10% per year.

In light of this, it's understandable that Worthington Steel's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Worthington Steel's P/S is on the lower end of the spectrum. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Worthington Steel (at least 1 which shouldn't be ignored), and understanding these should be part of your investment process.

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).

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.