Investors Appear Satisfied With Nel ASA's (OB:NEL) Prospects As Shares Rocket 31%

Those holding Nel ASA (OB:NEL) shares would be relieved that the share price has rebounded 31% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. But the last month did very little to improve the 53% share price decline over the last year.

Since its price has surged higher, given around half the companies in Norway's Electrical industry have price-to-sales ratios (or "P/S") below 1.2x, you may consider Nel as a stock to avoid entirely with its 6.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Nel

What Does Nel's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Nel has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Nel would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 84% gain to the company's top line. The latest three year period has also seen an excellent 191% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 39% per annum over the next three years. That's shaping up to be materially higher than the 13% per annum growth forecast for the broader industry.

In light of this, it's understandable that Nel's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has lead to Nel's P/S soaring as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Nel maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Electrical industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Nel that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.