There's Reason For Concern Over Enersense International Oyj's (HEL:ESENSE) Massive 25% Price Jump

Enersense International Oyj (HEL:ESENSE) shares have continued their recent momentum with a 25% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.9% over the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Enersense International Oyj's P/S ratio of 0.1x, since the median price-to-sales (or "P/S") ratio for the Commercial Services industry in Finland is also close to 0.5x. 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.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

See our latest analysis for Enersense International Oyj

What Does Enersense International Oyj's P/S Mean For Shareholders?

With its revenue growth in positive territory compared to the declining revenue of most other companies, Enersense International Oyj has been doing quite well of late. Perhaps the market is expecting its current strong performance to taper off in accordance to the rest of the industry, which has kept the P/S contained. Those who are bullish on Enersense International Oyj will be hoping that this isn't the case, so that they can pick up the stock at a slightly lower valuation.

Keen to find out how analysts think Enersense International Oyj's future stacks up against the industry? In that case, our free report is a great place to start.

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

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

If we review the last year of revenue growth, the company posted a worthy increase of 2.5%. The latest three year period has also seen an excellent 61% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the two analysts covering the company suggest revenue growth is heading into negative territory, declining 2.4% per annum over the next three years. That's not great when the rest of the industry is expected to grow by 8.3% each year.

In light of this, it's somewhat alarming that Enersense International Oyj's P/S sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Bottom Line On Enersense International Oyj's P/S

Its shares have lifted substantially and now Enersense International Oyj's P/S is back within range of the industry median. 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.

While Enersense International Oyj's P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Enersense International Oyj you should know about.

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.