Solvay SA (EBR:SOLB) Stock Rockets 25% As Investors Are Less Pessimistic Than Expected

Simply Wall St · 10/17 04:00

Solvay SA (EBR:SOLB) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 61% share price drop in the last twelve months.

Although its price has surged higher, it's still not a stretch to say that Solvay's price-to-sales (or "P/S") ratio of 0.8x right now seems quite "middle-of-the-road" compared to the Chemicals industry in Belgium, seeing as it matches the P/S ratio of the wider industry. 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 Solvay

ps-multiple-vs-industry
ENXTBR:SOLB Price to Sales Ratio vs Industry October 17th 2024

How Has Solvay Performed Recently?

Recent times have been pleasing for Solvay as its revenue has risen in spite of the industry's average revenue going into reverse. One possibility is that the P/S ratio is moderate because investors think the company's revenue will be less resilient moving forward. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Keen to find out how analysts think Solvay's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The P/S?

Solvay's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 51%. Still, revenue has fallen 47% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to slump, contracting by 1.9% each year during the coming three years according to the eleven analysts following the company. That's not great when the rest of the industry is expected to grow by 54% per year.

In light of this, it's somewhat alarming that Solvay's P/S sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 Solvay's P/S?

Its shares have lifted substantially and now Solvay's P/S is back within range of the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

While Solvay'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 declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Solvay that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.