Nokian Renkaat Oyj's (HEL:TYRES) Subdued P/S Might Signal An Opportunity

It's not a stretch to say that Nokian Renkaat Oyj's (HEL:TYRES) price-to-sales (or "P/S") ratio of 0.8x right now seems quite "middle-of-the-road" for companies in the Auto Components industry in Finland, where the median P/S ratio is around 0.3x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Nokian Renkaat Oyj

How Has Nokian Renkaat Oyj Performed Recently?

With its revenue growth in positive territory compared to the declining revenue of most other companies, Nokian Renkaat Oyj has been doing quite well of late. One possibility is that the P/S ratio is moderate because investors think the company's revenue will be less resilient moving forward. Those who are bullish on Nokian Renkaat Oyj will be hoping that this isn't the case, so that they can pick up the stock at a slightly lower valuation.

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

How Is Nokian Renkaat Oyj's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Nokian Renkaat Oyj's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.5% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 23% overall drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 13% per annum during the coming three years according to the eleven analysts following the company. That's shaping up to be materially higher than the 4.5% per annum growth forecast for the broader industry.

With this information, we find it interesting that Nokian Renkaat Oyj is trading at a fairly similar P/S compared to the industry. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Key Takeaway

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.

Looking at Nokian Renkaat Oyj's analyst forecasts revealed that its superior revenue outlook isn't giving the boost to its P/S that we would've expected. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. It appears some are indeed anticipating revenue instability, because these conditions should normally provide a boost to the share price.

Having said that, be aware Nokian Renkaat Oyj is showing 2 warning signs in our investment analysis, you should know about.

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.