Improved Revenues Required Before Koninklijke Philips N.V. (AMS:PHIA) Shares Find Their Feet

You may think that with a price-to-sales (or "P/S") ratio of 1.2x Koninklijke Philips N.V. (AMS:PHIA) is definitely a stock worth checking out, seeing as almost half of all the Medical Equipment companies in the Netherlands have P/S ratios greater than 3.7x and even P/S above 10x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Koninklijke Philips

How Has Koninklijke Philips Performed Recently?

Recent times haven't been great for Koninklijke Philips as its revenue has been rising slower than most other companies. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could 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 Koninklijke Philips.

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

In order to justify its P/S ratio, Koninklijke Philips would need to produce anemic growth that's substantially trailing the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. This isn't what shareholders were looking for as it means they've been left with a 7.8% decline in revenue over the last three years in total. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 4.8% each year during the coming three years according to the analysts following the company. With the industry predicted to deliver 9.0% growth per annum, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Koninklijke Philips' P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

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.

As expected, our analysis of Koninklijke Philips' analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for Koninklijke Philips that we have uncovered.

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.

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