Dr. Hönle AG's (ETR:HNL) Revenues Are Not Doing Enough For Some Investors

When you see that almost half of the companies in the Electrical industry in Germany have price-to-sales ratios (or "P/S") above 1.2x, Dr. Hönle AG (ETR:HNL) looks to be giving off some buy signals with its 0.5x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Dr. Hönle

How Dr. Hönle Has Been Performing

Dr. Hönle hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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

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

Dr. Hönle's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a frustrating 9.3% 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 7.9% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 6.6% per year as estimated by the two analysts watching the company. That's shaping up to be materially lower than the 9.4% per annum growth forecast for the broader industry.

In light of this, it's understandable that Dr. Hönle's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Dr. Hönle's P/S?

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 Dr. Hönle's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Dr. Hönle (1 is a bit unpleasant!) that we have uncovered.

If these risks are making you reconsider your opinion on Dr. Hönle, 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.