There Is A Reason Ørsted A/S' (CPH:ORSTED) Price Is Undemanding

Ørsted A/S' (CPH:ORSTED) price-to-sales (or "P/S") ratio of 1.5x might make it look like a buy right now compared to the Renewable Energy industry in Denmark, where around half of the companies have P/S ratios above 2.6x and even P/S above 5x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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Check out our latest analysis for Ørsted

What Does Ørsted's Recent Performance Look Like?

With only a limited decrease in revenue compared to most other companies of late, Ørsted has been doing relatively well. One possibility is that the P/S ratio is low because investors think this relatively better revenue performance might be about to deteriorate significantly. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. But at the very least, you'd be hoping that revenue doesn't fall off a cliff completely if your plan is to pick up some stock while it's out of favour.

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

Do Revenue Forecasts Match The Low P/S Ratio?

Ørsted'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 10% decrease to the company's top line. As a result, revenue from three years ago have also fallen 8.5% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 7.3% per year as estimated by the analysts watching the company. With the industry predicted to deliver 164% growth per year, the company is positioned for a weaker revenue result.

In light of this, it's understandable that Ørsted'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.

The Final Word

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.

As expected, our analysis of Ørsted's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor 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.

You always need to take note of risks, for example - Ørsted has 1 warning sign we think you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.