Ingevity Corporation's (NYSE:NGVT) price-to-sales (or "P/S") ratio of 1x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Chemicals industry in the United States have P/S ratios greater than 1.5x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Ingevity's P/S Mean For Shareholders?

Ingevity's negative revenue growth of late has neither been better nor worse than most other companies. One possibility is that the P/S ratio is low because investors think the company's revenue may begin to slide even faster. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. In saying that, existing shareholders may feel hopeful about the share price if the company's revenue continues tracking the industry.

How Is Ingevity's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Ingevity's is when the company's growth is on track to lag the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 2.3%. Even so, admirably revenue has lifted 31% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 8.4% as estimated by the five analysts watching the company. With the industry predicted to deliver 3.8% growth, that's a disappointing outcome.

In light of this, it's understandable that Ingevity's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What Does Ingevity's P/S Mean For Investors?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Ingevity's P/S is on the lower end of the spectrum. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. 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 1 warning sign for Ingevity that we have uncovered.

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.

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