Getting In Cheap On Serena Energia S.A. (BVMF:SRNA3) Is Unlikely

It's not a stretch to say that Serena Energia S.A.'s (BVMF:SRNA3) price-to-sales (or "P/S") ratio of 1.8x right now seems quite "middle-of-the-road" for companies in the Renewable Energy industry in Brazil, where the median P/S ratio is around 2x. 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.

Check out our latest analysis for Serena Energia

What Does Serena Energia's Recent Performance Look Like?

Serena Energia certainly has been doing a good job lately as it's been growing revenue more than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Serena Energia.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Serena Energia's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 26% last year. The strong recent performance means it was also able to grow revenue by 146% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the five analysts covering the company are not good at all, suggesting revenue should decline by 20% over the next year. The industry is also set to see revenue decline 6.1% but the stock is shaping up to perform materially worse.

In light of this, it's somewhat peculiar that Serena Energia's P/S sits in line with the majority of other companies. With revenue going quickly in reverse, it's not guaranteed that the P/S has found a floor yet. Maintaining these prices will be difficult to achieve as the weak outlook is likely to weigh down the shares eventually.

The Bottom Line On Serena Energia's P/S

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.

Serena Energia's analyst forecasts have revealed that its even shakier outlook against the industry isn't impacting its P/S as much as we would have predicted. Even though the company's P/S is on par with the rest of the industry, the fact that it's revenue outlook is poorer than an already struggling industry suggests that the P/S isn't justified. We're also cautious about the company's ability to resist even greater pain to its business from the broader industry turmoil. This presents a risk to investors if the P/S were to decline to a level that more accurately reflects the company's revenue prospects.

Before you settle on your opinion, we've discovered 2 warning signs for Serena Energia (1 is a bit unpleasant!) that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com