Investors Still Aren't Entirely Convinced By Elkem ASA's (OB:ELK) Revenues Despite 26% Price Jump

The Elkem ASA (OB:ELK) share price has done very well over the last month, posting an excellent gain of 26%. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, Elkem's price-to-sales (or "P/S") ratio of 0.4x might still make it look like a buy right now compared to the Chemicals industry in Norway, where around half of the companies have P/S ratios above 2.1x and even P/S above 47x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Elkem

How Elkem Has Been Performing

The recently shrinking revenue for Elkem has been in line with the industry. It might be that many expect the company's revenue performance to degrade further, which has repressed the P/S. You'd much rather the company continue improving its revenue if you still believe in the business. At the very least, you'd be hoping that revenue doesn't fall off a cliff if your plan is to pick up some stock while it's out of favour.

Keen to find out how analysts think Elkem's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The Low P/S Ratio?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 13%. Regardless, revenue has managed to lift by a handy 6.6% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 7.9% during the coming year according to the six analysts following the company. That's shaping up to be similar to the 8.6% growth forecast for the broader industry.

With this information, we find it odd that Elkem is trading at a P/S lower than the industry. It may be that most investors are not convinced the company can achieve future growth expectations.

The Bottom Line On Elkem's P/S

The latest share price surge wasn't enough to lift Elkem's P/S close to the industry median. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It looks to us like the P/S figures for Elkem remain low despite growth that is expected to be in line with other companies in the industry. The low P/S could be an indication that the revenue growth estimates are being questioned by the market. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

Plus, you should also learn about these 4 warning signs we've spotted with Elkem (including 1 which is concerning).

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).

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

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.