Materion Corporation's (NYSE:MTRN) price-to-sales (or "P/S") ratio of 0.9x might make it look like a buy right now compared to the Metals and Mining industry in the United States, where around half of the companies have P/S ratios above 1.8x and even P/S above 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.
Our free stock report includes 3 warning signs investors should be aware of before investing in Materion. Read for free now.View our latest analysis for Materion
What Does Materion's P/S Mean For Shareholders?
Materion could be doing better as it's been growing revenue less than most other companies lately. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Want the full picture on analyst estimates for the company? Then our free report on Materion will help you uncover what's on the horizon.What Are Revenue Growth Metrics Telling Us About The Low P/S?
There's an inherent assumption that a company should underperform the industry for P/S ratios like Materion's to be considered reasonable.
Retrospectively, the last year delivered a decent 6.9% gain to the company's revenues. Revenue has also lifted 7.1% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.
Looking ahead now, revenue is anticipated to climb by 2.5% each year during the coming three years according to the five analysts following the company. That's shaping up to be materially lower than the 5.5% each year growth forecast for the broader industry.
With this in consideration, its clear as to why Materion'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 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.
As expected, our analysis of Materion's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Before you take the next step, you should know about the 3 warning signs for Materion that we have uncovered.
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).
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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.