You may think that with a price-to-sales (or "P/S") ratio of 1.7x Elanco Animal Health Incorporated (NYSE:ELAN) is a stock worth checking out, seeing as almost half of all the Pharmaceuticals companies in the United States have P/S ratios greater than 2.9x and even P/S higher than 17x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

What Does Elanco Animal Health's P/S Mean For Shareholders?

Elanco Animal Health could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

How Is Elanco Animal Health's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Elanco Animal Health's is when the company's growth is on track to lag the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Although pleasingly revenue has lifted 35% in aggregate from three years ago, notwithstanding the last 12 months. Therefore, it's fair to say the revenue growth recently has been great for the company, but investors will want to ask why it has slowed to such an extent.

Shifting to the future, estimates from the twelve analysts covering the company suggest revenue should grow by 3.3% per year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 18% per year, which is noticeably more attractive.

With this information, we can see why Elanco Animal Health is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As expected, our analysis of Elanco Animal Health's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Elanco Animal Health with six simple checks will allow you to discover any risks that could be an issue.

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.