Optimistic Investors Push Lumi Gruppen AS (OB:LUMI) Shares Up 25% But Growth Is Lacking

Lumi Gruppen AS (OB:LUMI) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 19% over that time.

Since its price has surged higher, you could be forgiven for thinking Lumi Gruppen is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.7x, considering almost half the companies in Norway's Consumer Services industry have P/S ratios below 0.9x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Lumi Gruppen

How Has Lumi Gruppen Performed Recently?

Lumi Gruppen could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Lumi Gruppen will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Lumi Gruppen would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's top line. As a result, revenue from three years ago have also fallen 19% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 4.6% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 3.7% each year, which is not materially different.

With this information, we find it interesting that Lumi Gruppen is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Lumi Gruppen's P/S?

The large bounce in Lumi Gruppen's shares has lifted the company's P/S handsomely. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Given Lumi Gruppen's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for Lumi Gruppen you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com