Those holding Ingevity Corporation (NYSE:NGVT) shares would be relieved that the share price has rebounded 33% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 8.6% in the last twelve months.
Even after such a large jump in price, you could still be forgiven for feeling indifferent about Ingevity's P/S ratio of 1.2x, since the median price-to-sales (or "P/S") ratio for the Chemicals industry in the United States is about the same. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
View our latest analysis for Ingevity
How Ingevity Has Been Performing
While the industry has experienced revenue growth lately, Ingevity's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.
Want the full picture on analyst estimates for the company? Then our free report on Ingevity will help you uncover what's on the horizon.Do Revenue Forecasts Match The P/S Ratio?
In order to justify its P/S ratio, Ingevity would need to produce growth that's similar to the industry.
Retrospectively, the last year delivered a frustrating 18% decrease to the company's top line. As a result, revenue from three years ago have also fallen 7.1% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 0.5% as estimated by the four analysts watching the company. Meanwhile, the broader industry is forecast to expand by 11%, which paints a poor picture.
With this information, we find it concerning that Ingevity is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.
What We Can Learn From Ingevity's P/S?
Its shares have lifted substantially and now Ingevity's P/S is back within range of the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
While Ingevity's P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Ingevity, and understanding should be part of your investment process.
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.