When you see that almost half of the companies in the Renewable Energy industry in Germany have price-to-sales ratios (or "P/S") below 2.6x, Tion Renewables AG (ETR:TION) looks to be giving off some sell signals with its 4.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.
Check out our latest analysis for Tion Renewables
What Does Tion Renewables' P/S Mean For Shareholders?
Recent times have been advantageous for Tion Renewables as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Tion Renewables.
What Are Revenue Growth Metrics Telling Us About The High P/S?
In order to justify its P/S ratio, Tion Renewables would need to produce impressive growth in excess of the industry.
Taking a look back first, we see that the company grew revenue by an impressive 102% last year. This great performance means it was also able to deliver immense revenue growth over the last three years. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.
Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 0.2% each year as estimated by the two analysts watching the company. With the industry predicted to deliver 3.3% growth per annum, that's a disappointing outcome.
With this information, we find it concerning that Tion Renewables is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.
The Bottom Line On Tion Renewables' P/S
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.
We've established that Tion Renewables currently trades on a much higher than expected P/S for a company whose revenues are forecast to decline. Right now we aren't comfortable with the high P/S as the predicted future revenue decline likely to impact the positive sentiment that's propping up the P/S. At these price levels, investors should remain cautious, particularly if things don't improve.