Sasol Limited's (JSE:SOL) Prospects Need A Boost To Lift Shares

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. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Sasol

How Sasol Has Been Performing

Recent times have been more advantageous for Sasol as its revenue hasn't fallen as much as the rest of the industry. One possibility is that the P/S ratio is low because investors think this relatively better revenue performance might be about to deteriorate significantly. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. In saying that, existing shareholders probably aren't pessimistic about the share price if the company's revenue continues outplaying the industry.

Want the full picture on analyst estimates for the company? Then our free report on Sasol will help you uncover what's on the horizon.

Is There Any Revenue Growth Forecasted For Sasol?

The only time you'd be truly comfortable seeing a P/S as low as Sasol's is when the company's growth is on track to lag the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 5.0%. Even so, admirably revenue has lifted 36% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 4.6% per year as estimated by the nine analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 23% per annum, which is noticeably more attractive.

With this information, we can see why Sasol is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. The company will need a change of fortune to justify the P/S rising higher in the future.

Having said that, be aware Sasol is showing 1 warning sign in our investment analysis, you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.