Market Still Lacking Some Conviction On Elkem ASA (OB:ELK)

You may think that with a price-to-sales (or "P/S") ratio of 0.3x Elkem ASA (OB:ELK) is definitely a stock worth checking out, seeing as almost half of all the Chemicals companies in Norway have P/S ratios greater than 2.4x and even P/S above 23x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Elkem

How Elkem Has Been Performing

The recently shrinking revenue for Elkem has been in line with the industry. One possibility is that the P/S ratio is low because investors think the company's revenue may begin to slide even faster. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. In saying that, existing shareholders may feel hopeful about the share price if the company's revenue continues tracking the industry.

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

Is There Any Revenue Growth Forecasted For Elkem?

In order to justify its P/S ratio, Elkem would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 6.6% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 13% as estimated by the five analysts watching the company. With the industry only predicted to deliver 7.6%, the company is positioned for a stronger revenue result.

In light of this, it's peculiar that Elkem's P/S sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

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.

Elkem's analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. The reason for this depressed P/S could potentially be found in the risks the market is pricing in. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Elkem (1 can't be ignored!) that you should be aware of before investing here.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.