International Flavors & Fragrances Inc.'s (NYSE:IFF) price-to-sales (or "P/S") ratio of 2x may not look like an appealing investment opportunity when you consider close to half the companies in the Chemicals industry in the United States have P/S ratios below 1.4x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

How Has International Flavors & Fragrances Performed Recently?

International Flavors & Fragrances' negative revenue growth of late has neither been better nor worse than most other companies. One possibility is that the P/S ratio is high because investors think the company can turn things around and break free from the broader downward trend in revenue. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For International Flavors & Fragrances?

There's an inherent assumption that a company should outperform the industry for P/S ratios like International Flavors & Fragrances' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 1.8% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 15% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Turning to the outlook, the next three years should generate growth of 0.7% per annum as estimated by the analysts watching the company. That's shaping up to be materially lower than the 6.0% each year growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that International Flavors & Fragrances' P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

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.

We've concluded that International Flavors & Fragrances currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for International Flavors & Fragrances 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.

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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.