Market Participants Recognise Lechwerke AG's (FRA:LEC) Revenues
When close to half the companies in the Electric Utilities industry in Germany have price-to-sales ratios (or "P/S") below 0.3x, you may consider Lechwerke AG (FRA:LEC) as a stock to potentially avoid with its 1.4x 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.
View our latest analysis for Lechwerke
How Has Lechwerke Performed Recently?
The revenue growth achieved at Lechwerke over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Lechwerke's earnings, revenue and cash flow.
Do Revenue Forecasts Match The High P/S Ratio?
The only time you'd be truly comfortable seeing a P/S as high as Lechwerke's is when the company's growth is on track to outshine the industry.
Retrospectively, the last year delivered a decent 8.5% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 46% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Weighing the recent medium-term upward revenue trajectory against the broader industry's one-year forecast for contraction of 2.8% shows it's a great look while it lasts.
With this in mind, it's clear to us why Lechwerke's P/S exceeds that of its industry peers. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the industry. However, its current revenue trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.
What Does Lechwerke's P/S Mean For Investors?
We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We see that Lechwerke justifiably maintains its high P/S on the merits of its recentthree-year revenue growth beating forecasts amidst struggling industry. It could be said that investors feel this revenue growth will continue into the future, justifying a higher P/S ratio. We still remain cautious about the company's ability to stay its recent course and swim against the current of the broader industry turmoil. If things remain consistent though, shareholders shouldn't expect any major share price shocks in the near term.
Before you take the next step, you should know about the 2 warning signs for Lechwerke (1 makes us a bit uncomfortable!) that we have uncovered.
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.