Solteq Oyj (HEL:SOLTEQ) Looks Inexpensive But Perhaps Not Attractive Enough

Solteq Oyj's (HEL:SOLTEQ) price-to-sales (or "P/S") ratio of 0.2x might make it look like a buy right now compared to the Software industry in Finland, where around half of the companies have P/S ratios above 1.8x and even P/S above 4x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Solteq Oyj

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

Solteq Oyj could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

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

The only time you'd be truly comfortable seeing a P/S as low as Solteq Oyj's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 1.7% decrease to the company's top line. 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 14% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue growth is heading into negative territory, declining 4.1% per year over the next three years. Meanwhile, the broader industry is forecast to expand by 14% per year, which paints a poor picture.

In light of this, it's understandable that Solteq Oyj's P/S would sit below the majority of other companies. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Solteq Oyj's P/S

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Solteq Oyj's P/S is on the lower end of the spectrum. As other companies in the industry are forecasting revenue growth, Solteq Oyj's poor outlook justifies its low P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

It is also worth noting that we have found 3 warning signs for Solteq Oyj (1 can't be ignored!) that you need to take into consideration.

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.