There's Reason For Concern Over Intrepid Potash, Inc.'s (NYSE:IPI) Price
Intrepid Potash, Inc. (NYSE:IPI) has a price-to-sales (P/S) ratio of 1.3x, slightly above the Chemicals industry median of 1x. Despite recent revenue growth of 7.9%, the company has struggled with a 25% revenue decline over the past three years. Analysts predict only 1.6% growth next year, compared to the industry’s 9.3%. This muted outlook raises concerns about the sustainability of its current P/S ratio, suggesting potential risks for investors if revenue growth does not improve. A warning sign has also been identified for the company.
It's not a stretch to say that Intrepid Potash, Inc.'s (NYSE:IPI) price-to-sales (or "P/S") ratio of 1.3x right now seems quite "middle-of-the-road" for companies in the Chemicals industry in the United States, where the median P/S ratio is around 1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
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View our latest analysis for Intrepid Potash
How Intrepid Potash Has Been Performing
With revenue growth that's superior to most other companies of late, Intrepid Potash has been doing relatively well. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Intrepid Potash.
Do Revenue Forecasts Match The P/S Ratio?
There's an inherent assumption that a company should be matching the industry for P/S ratios like Intrepid Potash's to be considered reasonable.
Taking a look back first, we see that the company managed to grow revenues by a handy 7.9% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 25% in total over the last three years. 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 generate growth of 1.6% as estimated by the two analysts watching the company. With the industry predicted to deliver 9.3% growth, the company is positioned for a weaker revenue result.
With this information, we find it interesting that Intrepid Potash is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.
What Does Intrepid Potash's P/S Mean For Investors?
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.
When you consider that Intrepid Potash's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.
Before you take the next step, you should know about the 1 warning sign for Intrepid Potash that we have uncovered.
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.
