Slammed 25% Exel Composites Oyj (HEL:EXL1V) Screens Well Here But There Might Be A Catch

Exel Composites Oyj (HEL:EXL1V) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 89% share price decline.

Although its price has dipped substantially, there still wouldn't be many who think Exel Composites Oyj's price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S in Finland's Machinery industry is similar at about 0.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Exel Composites Oyj

How Exel Composites Oyj Has Been Performing

While the industry has experienced revenue growth lately, Exel Composites Oyj's revenue has gone into reverse gear, which is not great. 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.

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

Do Revenue Forecasts Match The P/S Ratio?

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

Retrospectively, the last year delivered a frustrating 8.6% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 23% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 8.7% per year over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 3.9% each year, which is noticeably less attractive.

With this in consideration, we find it intriguing that Exel Composites Oyj's P/S is closely matching its industry peers. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Final Word

With its share price dropping off a cliff, the P/S for Exel Composites Oyj looks to be in line with the rest of the Machinery industry. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Exel Composites Oyj currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. Perhaps uncertainty in the revenue forecasts are what's keeping the P/S ratio consistent with the rest of the industry. This uncertainty seems to be reflected in the share price which, while stable, could be higher given the revenue forecasts.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Exel Composites Oyj (at least 2 which make us uncomfortable), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Exel Composites Oyj, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.