Kongsberg Automotive ASA's (OB:KOA) Shares Climb 30% But Its Business Is Yet to Catch Up

Kongsberg Automotive ASA (OB:KOA) shares have had a really impressive month, gaining 30% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 6.2% over the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Kongsberg Automotive's P/S ratio of 0.2x, since the median price-to-sales (or "P/S") ratio for the Auto Components industry in Norway is also close to 0.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Kongsberg Automotive

What Does Kongsberg Automotive's Recent Performance Look Like?

Kongsberg Automotive has been struggling lately as its revenue has declined faster than most other companies. One possibility is that the P/S is moderate because investors think the company's revenue trend will eventually fall in line with most others in the industry. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.

Keen to find out how analysts think Kongsberg Automotive'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?

The only time you'd be comfortable seeing a P/S like Kongsberg Automotive's is when the company's growth is tracking the industry closely.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 8.3%. Regardless, revenue has managed to lift by a handy 27% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue growth is heading into negative territory, declining 0.4% over the next year. That's not great when the rest of the industry is expected to grow by 3.7%.

With this in consideration, we think it doesn't make sense that Kongsberg Automotive's P/S is closely matching its industry peers. 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 Key Takeaway

Its shares have lifted substantially and now Kongsberg Automotive's P/S is back within range of the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our check of Kongsberg Automotive's analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Kongsberg Automotive that you should be aware of.

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).

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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.