Origin Materials, Inc. (NASDAQ:ORGN) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Indeed, the recent drop has reduced its annual gain to a relatively sedate 4.8% over the last twelve months.

In spite of the heavy fall in price, when almost half of the companies in the United States' Chemicals industry have price-to-sales ratios (or "P/S") below 1.4x, you may still consider Origin Materials as a stock not worth researching with its 4.7x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Origin Materials' P/S Mean For Shareholders?

Origin Materials 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. The P/S ratio is probably high because investors think the company will continue to navigate the broader industry headwinds better than most. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Origin Materials.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Origin Materials would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, we see the company's revenues grew exponentially. Although, its longer-term performance hasn't been anywhere near as strong with three-year revenue growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next year should generate growth of 72% as estimated by the only analyst watching the company. Meanwhile, the rest of the industry is forecast to only expand by 2.9%, which is noticeably less attractive.

In light of this, it's understandable that Origin Materials' P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does Origin Materials' P/S Mean For Investors?

Even after such a strong price drop, Origin Materials' P/S still exceeds the industry median significantly. 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 Origin Materials' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Origin Materials (1 is a bit concerning) you should be aware of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.