GrafTech International Ltd. (NYSE:EAF) Surges 27% Yet Its Low P/S Is No Reason For Excitement

GrafTech International Ltd. (NYSE:EAF) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.6% over the last year.

Although its price has surged higher, GrafTech International's price-to-sales (or "P/S") ratio of 0.8x might still make it look like a buy right now compared to the Electrical industry in the United States, where around half of the companies have P/S ratios above 2.3x and even P/S above 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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Check out our latest analysis for GrafTech International

How GrafTech International Has Been Performing

While the industry has experienced revenue growth lately, GrafTech International's revenue has gone into reverse gear, which is not great. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

How Is GrafTech International's Revenue Growth Trending?

In order to justify its P/S ratio, GrafTech International would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 3.7% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 63% 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.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 9.8% over the next year. Meanwhile, the rest of the industry is forecast to expand by 12%, which is noticeably more attractive.

With this information, we can see why GrafTech International is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On GrafTech International's P/S

The latest share price surge wasn't enough to lift GrafTech International's P/S close to the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of GrafTech International's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 3 warning signs for GrafTech International (2 are a bit unpleasant!) that you should be aware of.

If these risks are making you reconsider your opinion on GrafTech International, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.