Telefonaktiebolaget LM Ericsson (publ)'s (STO:ERIC B) Share Price Is Matching Sentiment Around Its Revenues

When you see that almost half of the companies in the Communications industry in Sweden have price-to-sales ratios (or "P/S") above 2x, Telefonaktiebolaget LM Ericsson (publ) (STO:ERIC B) looks to be giving off some buy signals with its 1.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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Check out our latest analysis for Telefonaktiebolaget LM Ericsson

What Does Telefonaktiebolaget LM Ericsson's Recent Performance Look Like?

The recently shrinking revenue for Telefonaktiebolaget LM Ericsson 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. 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.

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

Is There Any Revenue Growth Forecasted For Telefonaktiebolaget LM Ericsson?

Telefonaktiebolaget LM Ericsson's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

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 1.8%. 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 5.0% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 0.8% per year over the next three years. With the industry predicted to deliver 3.7% growth per annum, the company is positioned for a weaker revenue result.

With this information, we can see why Telefonaktiebolaget LM Ericsson is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

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.

As expected, our analysis of Telefonaktiebolaget LM Ericsson's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.

Before you take the next step, you should know about the 2 warning signs for Telefonaktiebolaget LM Ericsson that we have uncovered.

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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.