The Market Lifts eo Networks S.A. (WSE:EON) Shares 27% But It Can Do More

eo Networks S.A. (WSE:EON) shares have continued their recent momentum with a 27% gain in the last month alone. The last month tops off a massive increase of 107% in the last year.

In spite of the firm bounce in price, eo Networks' price-to-sales (or "P/S") ratio of 0.7x might still make it look like a buy right now compared to the Software industry in Poland, where around half of the companies have P/S ratios above 1.8x and even P/S above 5x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for eo Networks

How Has eo Networks Performed Recently?

The revenue growth achieved at eo Networks over the last year would be more than acceptable for most companies. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. Those who are bullish on eo Networks will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for eo Networks, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is eo Networks' Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 15% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 67% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

When compared to the industry's one-year growth forecast of 7.5%, the most recent medium-term revenue trajectory is noticeably more alluring

With this information, we find it odd that eo Networks is trading at a P/S lower than the industry. It looks like most investors are not convinced the company can maintain its recent growth rates.

What Does eo Networks' P/S Mean For Investors?

eo Networks' stock price has surged recently, but its but its P/S still remains modest. 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're very surprised to see eo Networks currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

We don't want to rain on the parade too much, but we did also find 3 warning signs for eo Networks (2 don't sit too well with us!) that you need to be mindful 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.