Risks To Shareholder Returns Are Elevated At These Prices For TietoEVRY Oyj (HEL:TIETO)

With a median price-to-sales (or "P/S") ratio of close to 0.8x in the IT industry in Finland, you could be forgiven for feeling indifferent about TietoEVRY Oyj's (HEL:TIETO) P/S ratio, which comes in at about the same. 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.

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View our latest analysis for TietoEVRY Oyj

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

Recent times have been advantageous for TietoEVRY Oyj as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

Do Revenue Forecasts Match The P/S Ratio?

TietoEVRY Oyj's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 29%. However, this wasn't enough as the latest three year period has seen the company endure a nasty 4.2% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to plummet, contracting by 11% per year during the coming three years according to the eight analysts following the company. Meanwhile, the broader industry is forecast to moderate by 8.7% each year, which indicates the company should perform poorly indeed.

With this information, it's perhaps strange that TietoEVRY Oyj is trading at a fairly similar P/S in comparison. When revenue shrink rapidly the P/S often shrinks too, which could set up shareholders for future disappointment. Maintaining these prices will be difficult to achieve as the weak outlook is likely to weigh down the shares eventually.

What We Can Learn From TietoEVRY Oyj's P/S?

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.

TietoEVRY Oyj currently trades on a higher P/S than expected based on revenue decline, even more so since its revenue forecast is even worse than the struggling industry. It's not unusual in cases where revenue growth is poor, that the share price declines, sending the moderate P/S lower relative to the industry. We're also cautious about the company's ability to resist even greater pain to its business from the broader industry turmoil. A positive change is needed in order to justify the current price-to-sales ratio.

Plus, you should also learn about these 2 warning signs we've spotted with TietoEVRY Oyj.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.