Eneco Energy Limited (SGX:R14) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness.    Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 38% over that time.  

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Eneco Energy's P/S ratio of 0.6x, since the median price-to-sales (or "P/S") ratio for the Logistics industry in Singapore is about the same.  While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.    

SGX:R14 Price to Sales Ratio vs Industry April 26th 2024

What Does Eneco Energy's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Eneco Energy over the last year, which is not ideal at all.   One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future.  If not, then existing shareholders may be a little nervous about the viability of the share price.    

Although there are no analyst estimates available for Eneco Energy, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.  

Is There Some Revenue Growth Forecasted For Eneco Energy?  

There's an inherent assumption that a company should be matching the industry for P/S ratios like Eneco Energy'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 4.5%.   This means it has also seen a slide in revenue over the longer-term as revenue is down 17% in total over the last three years.  So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.  

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 12% shows it's an unpleasant look.

With this information, we find it concerning that Eneco Energy is trading at a fairly similar P/S compared to the industry.  It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects.  Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.  

The Key Takeaway

Eneco Energy appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry      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.

The fact that Eneco Energy currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow.  Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long.  Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.    

We don't want to rain on the parade too much, but we did also find 4 warning signs for Eneco Energy (1 shouldn't be ignored!) that you need to be mindful of.  

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.