Telefonaktiebolaget LM Ericsson (publ)'s (STO:ERIC B) Revenues Are Not Doing Enough For Some Investors

Telefonaktiebolaget LM Ericsson (publ)'s (STO:ERIC B) price-to-sales (or "P/S") ratio of 1x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Communications industry in Sweden have P/S ratios greater than 2.4x. 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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Check out our latest analysis for Telefonaktiebolaget LM Ericsson

What Does Telefonaktiebolaget LM Ericsson's P/S Mean For Shareholders?

The recently shrinking revenue for Telefonaktiebolaget LM Ericsson 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. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. 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.

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How Is Telefonaktiebolaget LM Ericsson's Revenue Growth Trending?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 1.5%. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, revenue is anticipated to climb by 0.006% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 3.5% each year, which is noticeably more attractive.

In light of this, it's understandable that Telefonaktiebolaget LM Ericsson's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Telefonaktiebolaget LM Ericsson maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. The company will need a change of fortune to justify the P/S rising higher in the future.

Before you settle on your opinion, we've discovered 2 warning signs for Telefonaktiebolaget LM Ericsson that 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.