International Flavors & Fragrances Inc.'s (NYSE:IFF) price-to-sales (or "P/S") ratio of 2.3x 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 International Flavors & Fragrances Has Been Performing

The recently shrinking revenue for International Flavors & Fragrances has been in line with the industry. Perhaps the market is expecting the company to reverse its fortunes and beat out a struggling industry in the future, elevating the P/S. If not, then existing shareholders may be a little nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, International Flavors & Fragrances would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 4.7% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 40% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 1.3% each year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 7.0% per year growth forecast for the broader industry.

In light of this, it's alarming that International Flavors & Fragrances' P/S sits above the majority of other companies. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does International Flavors & Fragrances' P/S Mean For Investors?

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Despite analysts forecasting some poorer-than-industry revenue growth figures for International Flavors & Fragrances, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 1 warning sign for International Flavors & Fragrances you should be aware of.

If you're unsure about the strength of International Flavors & Fragrances' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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