What You Can Learn From Elaris AG's (ETR:ELS) P/S After Its 42% Share Price Crash

To the annoyance of some shareholders, Elaris AG (ETR:ELS) shares are down a considerable 42% in the last month, which continues a horrid run for the company. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

In spite of the heavy fall in price, given around half the companies in Germany's Auto industry have price-to-sales ratios (or "P/S") below 0.3x, you may still consider Elaris as a stock to avoid entirely with its 12.3x 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.

Check out our latest analysis for Elaris

How Has Elaris Performed Recently?

Elaris certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Elaris will help you uncover what's on the horizon.

How Is Elaris' Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 219% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 242% each year as estimated by the lone analyst watching the company. With the industry only predicted to deliver 3.4% each year, the company is positioned for a stronger revenue result.

With this information, we can see why Elaris is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Elaris' shares may have suffered, but its P/S remains high. 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 established that Elaris maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Auto industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Elaris, and understanding should be part of your investment process.

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.