Sasol Limited's (JSE:SOL) Price Is Right But Growth Is Lacking

Sasol Limited's (JSE:SOL) price-to-sales (or "P/S") ratio of 0.3x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Chemicals industry in South Africa have P/S ratios greater than 1.2x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Sasol

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

With revenue growth that's inferior to most other companies of late, Sasol has been relatively sluggish. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

How Is Sasol's Revenue Growth Trending?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 6.2% last year. This was backed up an excellent period prior to see revenue up 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 revenues over that time.

Looking ahead now, revenue is anticipated to climb by 1.8% each year during the coming three years according to the ten analysts following the company. With the industry predicted to deliver 5.2% growth per annum, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Sasol's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

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.

We've established that Sasol maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 4 warning signs for Sasol that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.