When close to half the companies operating in the Chemicals industry in the United States have price-to-sales ratios (or "P/S") above 1.1x, you may consider Dow Inc. (NYSE:DOW) as an attractive investment with its 0.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.
See our latest analysis for Dow
What Does Dow's P/S Mean For Shareholders?
Dow hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.
Want the full picture on analyst estimates for the company? Then our free report on Dow will help you uncover what's on the horizon.How Is Dow's Revenue Growth Trending?
The only time you'd be truly comfortable seeing a P/S as low as Dow's is when the company's growth is on track to lag the industry.
Retrospectively, the last year delivered a frustrating 2.1% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 27% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.
Looking ahead now, revenue is anticipated to climb by 1.3% each year during the coming three years according to the analysts following the company. With the industry predicted to deliver 5.4% growth each year, the company is positioned for a weaker revenue result.
In light of this, it's understandable that Dow's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Key Takeaway
Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Dow's analyst forecasts revealed that its inferior revenue outlook is contributing 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. It's hard to see the share price rising strongly in the near future under these circumstances.
Having said that, be aware Dow is showing 4 warning signs in our investment analysis, and 2 of those are concerning.
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.