Arise AB (publ)'s (STO:ARISE) Shares May Have Run Too Fast Too Soon

With a median price-to-sales (or "P/S") ratio of close to 3.4x in the Renewable Energy industry in Sweden, you could be forgiven for feeling indifferent about Arise AB (publ)'s (STO:ARISE) P/S ratio of 4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Arise

What Does Arise's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Arise's revenue has gone into reverse gear, which is not great. 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.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Arise.

What Are Revenue Growth Metrics Telling Us About The P/S?

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

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 57%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 300% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Looking ahead now, revenue is anticipated to climb by 6.6% during the coming year according to the two analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 299%, which is noticeably more attractive.

With this in mind, we find it intriguing that Arise's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

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.

When you consider that Arise's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

Plus, you should also learn about these 2 warning signs we've spotted with Arise.

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.