Investors Appear Satisfied With Nel ASA's (OB:NEL) Prospects

Nel ASA's (OB:NEL) price-to-sales (or "P/S") ratio of 22x may look like a poor investment opportunity when you consider close to half the companies in the Electrical industry in Norway have P/S ratios below 3.4x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Nel

How Nel Has Been Performing

Recent times haven't been great for Nel as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. If not, then existing shareholders may be very nervous about the viability of the share price.

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

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

Nel's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 33%. The strong recent performance means it was also able to grow revenue by 105% 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 three years should generate growth of 57% per year as estimated by the analysts watching the company. With the industry only predicted to deliver 13% per year, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Nel's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Nel'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.

Our look into Nel shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Nel that you should be aware of.

If you're unsure about the strength of Nel's 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.