Engie Energia Chile S.A.'s (SNSE:ECL) Business Is Yet to Catch Up With Its Share Price

There wouldn't be many who think Engie Energia Chile S.A.'s (SNSE:ECL) price-to-sales (or "P/S") ratio of 0.5x is worth a mention when the median P/S for the Electric Utilities industry in Chile is similar at about 0.6x. 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.

See our latest analysis for Engie Energia Chile

What Does Engie Energia Chile's P/S Mean For Shareholders?

Engie Energia Chile 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 not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Keen to find out how analysts think Engie Energia Chile's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The P/S?

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

If we review the last year of revenue growth, the company posted a terrific increase of 25%. Pleasingly, revenue has also lifted 68% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the three 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 1.5% but the stock is shaping up to perform materially worse.

With this information, it's perhaps strange that Engie Energia Chile is trading at a fairly similar P/S in comparison. When revenue shrink rapidly the P/S often shrinks too, which could set up shareholders for future disappointment. There's potential for the P/S to fall to lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Engie Energia Chile's P/S

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.

Engie Energia Chile'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. In addition, we would be concerned whether the company can even maintain this level of performance under these tough industry conditions. A positive change is needed in order to justify the current price-to-sales ratio.

Before you take the next step, you should know about the 1 warning sign for Engie Energia Chile 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.