Reka Industrial Oyj's (HEL:REKA) Popularity With Investors Is Under Threat From Overpricing

When you see that almost half of the companies in the Auto Components industry in Finland have price-to-sales ratios (or "P/S") below 0.3x, Reka Industrial Oyj (HEL:REKA) looks to be giving off some sell signals with its 1x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Reka Industrial Oyj

How Has Reka Industrial Oyj Performed Recently?

As an illustration, revenue has deteriorated at Reka Industrial Oyj over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Reka Industrial Oyj will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Reka Industrial Oyj?

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

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%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 11% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

It's interesting to note that the rest of the industry is similarly expected to grow by 1.8% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Reka Industrial Oyj is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as a continuation of recent revenue trends would weigh down the share price eventually.

The Final Word

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.

Our examination of Reka Industrial Oyj revealed its three-year revenue trends aren't impacting its high P/S as much as we would have predicted, given they look similar to current industry expectations. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Reka Industrial Oyj, and understanding them should be part of your investment process.

If you're unsure about the strength of Reka Industrial Oyj's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.