Elanco Animal Health Incorporated (NYSE:ELAN) shareholders won't be pleased to see that the share price has had a very rough month, dropping 29% and undoing the prior period's positive performance. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 11%.

Since its price has dipped substantially, Elanco Animal Health may be sending buy signals at present with its price-to-sales (or "P/S") ratio of 1.5x, considering almost half of all companies in the Pharmaceuticals industry in the United States have P/S ratios greater than 2.9x and even P/S higher than 11x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

How Elanco Animal Health Has Been Performing

Elanco Animal Health 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. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Is There Any Revenue Growth Forecasted For Elanco Animal Health?

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, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 1.7%. Regardless, revenue has managed to lift by a handy 13% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Turning to the outlook, the next three years should generate growth of 4.2% each year as estimated by the eleven analysts watching the company. With the industry predicted to deliver 20% growth each year, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Elanco Animal Health's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Elanco Animal Health's P/S has taken a dip along with its share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Elanco Animal Health maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Elanco Animal Health, and understanding should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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