When you see that almost half of the companies in the Chemicals industry in the United States have price-to-sales ratios (or "P/S") above 1.5x, Kronos Worldwide, Inc. (NYSE:KRO) looks to be giving off some buy signals with its 0.7x 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.

What Does Kronos Worldwide's P/S Mean For Shareholders?

Kronos Worldwide certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. One possibility is that the P/S ratio is low because investors think the company's revenue is going to fall away like everyone else's soon. Those who are bullish on Kronos Worldwide will be hoping that this isn't the case and the company continues to beat out the industry.

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Kronos Worldwide's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 16% last year. Still, revenue has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, revenue is anticipated to climb by 23% during the coming year according to the two analysts following the company. With the industry only predicted to deliver 3.1%, the company is positioned for a stronger revenue result.

With this in consideration, we find it intriguing that Kronos Worldwide's P/S sits behind most of its industry peers. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

To us, it seems Kronos Worldwide currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. There could be some major risk factors that are placing downward pressure on the P/S ratio. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

Before you take the next step, you should know about the 4 warning signs for Kronos Worldwide (2 are a bit concerning!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.