Spinnova Oyj's (HEL:SPINN) Price Is Out Of Tune With Revenues

Spinnova Oyj's (HEL:SPINN) price-to-sales (or "P/S") ratio of 11.2x may look like a poor investment opportunity when you consider close to half the companies in the Luxury industry in Finland have P/S ratios below 0.6x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Spinnova Oyj

How Has Spinnova Oyj Performed Recently?

Recent times have been advantageous for Spinnova Oyj as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. 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 Spinnova Oyj.

Is There Enough Revenue Growth Forecasted For Spinnova Oyj?

The only time you'd be truly comfortable seeing a P/S as steep as Spinnova Oyj's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months. Spectacularly, three year revenue growth has also set the world alight, thanks to the last 12 months of incredible growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the one analyst covering the company suggest revenue growth is heading into negative territory, declining 57% over the next year. That's not great when the rest of the industry is expected to grow by 11%.

With this in mind, we find it intriguing that Spinnova Oyj's P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

What Does Spinnova Oyj's P/S Mean For Investors?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

For a company with revenues that are set to decline in the context of a growing industry, Spinnova Oyj's P/S is much higher than we would've anticipated. In cases like this where we see revenue decline on the horizon, we suspect the share price is at risk of following suit, bringing back the high P/S into the realms of suitability. At these price levels, investors should remain cautious, particularly if things don't improve.

You need to take note of risks, for example - Spinnova Oyj has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.