Investors Appear Satisfied With Ovzon AB (publ)'s (STO:OVZON) Prospects As Shares Rocket 26%

Ovzon AB (publ) (STO:OVZON) shares have continued their recent momentum with a 26% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 35% over that time.

After such a large jump in price, you could be forgiven for thinking Ovzon is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.1x, considering almost half the companies in Sweden's Telecom industry have P/S ratios below 1.2x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Ovzon

How Has Ovzon Performed Recently?

Ovzon 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. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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

Is There Enough Revenue Growth Forecasted For Ovzon?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Ovzon'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 4.9%. Even so, admirably revenue has lifted 107% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 38% over the next year. That's shaping up to be materially higher than the 2.7% growth forecast for the broader industry.

With this in mind, it's not hard to understand why Ovzon's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

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

The strong share price surge has lead to Ovzon's P/S soaring as well. 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.

As we suspected, our examination of Ovzon's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware Ovzon is showing 3 warning signs in our investment analysis, and 1 of those can't be ignored.

If these risks are making you reconsider your opinion on Ovzon, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.