Reka Industrial Oyj's (HEL:REKA) 25% Price Boost Is Out Of Tune With Revenues

Reka Industrial Oyj (HEL:REKA) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.9% in the last twelve months.

Following the firm bounce in price, given close to half the companies operating in Finland's Auto Components industry have price-to-sales ratios (or "P/S") below 0.3x, you may consider Reka Industrial Oyj as a stock to potentially avoid with its 1.2x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Reka Industrial Oyj

What Does Reka Industrial Oyj's Recent Performance Look Like?

For instance, Reka Industrial Oyj's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Although there are no analyst estimates available for Reka Industrial Oyj, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

In order to justify its P/S ratio, Reka Industrial Oyj would need to produce impressive growth in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 11%. As a result, revenue from three years ago have also fallen 80% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 3.6% shows it's an unpleasant look.

With this in mind, we find it worrying that Reka Industrial Oyj's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Reka Industrial Oyj's P/S Mean For Investors?

The large bounce in Reka Industrial Oyj's shares has lifted the company's P/S handsomely. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Reka Industrial Oyj revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

You should always think about risks. Case in point, we've spotted 2 warning signs for Reka Industrial Oyj you should be aware of, and 1 of them doesn't sit too well with us.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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.