There's Reason For Concern Over Hexagon Composites ASA's (OB:HEX) Massive 29% Price Jump

Hexagon Composites ASA (OB:HEX) shares have continued their recent momentum with a 29% gain in the last month alone. Looking further back, the 18% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Hexagon Composites' P/S ratio of 1.5x, since the median price-to-sales (or "P/S") ratio for the Machinery industry in Norway is also close to 1.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Hexagon Composites

What Does Hexagon Composites' P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Hexagon Composites has been doing relatively well. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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

Is There Some Revenue Growth Forecasted For Hexagon Composites?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Hexagon Composites' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 16% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 69% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 2.8% as estimated by the four analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 14%, which is noticeably more attractive.

With this information, we find it interesting that Hexagon Composites is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

Hexagon Composites' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

When you consider that Hexagon Composites' revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Hexagon Composites that you need to be mindful of.

If you're unsure about the strength of Hexagon Composites' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.