It's Down 26% But Componenta Corporation (HEL:CTH1V) Could Be Riskier Than It Looks

Componenta Corporation (HEL:CTH1V) shares have had a horrible month, losing 26% after a relatively good period beforehand. The last month has meant the stock is now only up 3.0% during the last year.

In spite of the heavy fall in price, it's still not a stretch to say that Componenta's price-to-sales (or "P/S") ratio of 0.3x right now seems quite "middle-of-the-road" compared to the Machinery industry in Finland, where the median P/S ratio is around 0.7x. 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.

View our latest analysis for Componenta

What Does Componenta's Recent Performance Look Like?

Componenta 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. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Componenta would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 20%. 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 20% 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.

Turning to the outlook, the next three years should generate growth of 15% each year as estimated by the one analyst watching the company. With the industry only predicted to deliver 3.9% per annum, the company is positioned for a stronger revenue result.

With this information, we find it interesting that Componenta 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 Bottom Line On Componenta's P/S

Following Componenta's share price tumble, its P/S is just clinging on to the industry median 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.

Despite enticing revenue growth figures that outpace the industry, Componenta's P/S isn't quite what we'd expect. When we see a strong revenue outlook, with growth outpacing the industry, we can only assume potential uncertainty around these figures are what might be placing slight pressure on the P/S ratio. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Componenta that 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.