XXL ASA (OB:XXL) Screens Well But There Might Be A Catch

It's not a stretch to say that XXL ASA's (OB:XXL) price-to-sales (or "P/S") ratio of 0.2x right now seems quite "middle-of-the-road" for companies in the Specialty Retail industry in Norway, where the median P/S ratio is around 0.3x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for XXL

How Has XXL Performed Recently?

XXL hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

Is There Some Revenue Growth Forecasted For XXL?

The only time you'd be comfortable seeing a P/S like XXL's is when the company's growth is tracking the industry closely.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 12%. The last three years don't look nice either as the company has shrunk revenue by 26% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 12% over the next year. With the industry only predicted to deliver 7.4%, the company is positioned for a stronger revenue result.

With this in consideration, we find it intriguing that XXL's P/S is closely matching its industry peers. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

What We Can Learn From XXL's P/S?

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.

Looking at XXL's analyst forecasts revealed that its superior revenue outlook isn't giving the boost to its P/S that we would've expected. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with XXL, and understanding should be part of your investment process.

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.