Engie Energia Chile S.A.'s (SNSE:ECL) Shares Climb 25% But Its Business Is Yet to Catch Up

Engie Energia Chile S.A. (SNSE:ECL) shareholders have had their patience rewarded with a 25% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 48% in the last year.

Although its price has surged higher, there still wouldn't be many who think Engie Energia Chile's price-to-sales (or "P/S") ratio of 0.7x is worth a mention when the median P/S in Chile's Electric Utilities industry is similar at about 0.8x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Our free stock report includes 2 warning signs investors should be aware of before investing in Engie Energia Chile. Read for free now.

View our latest analysis for Engie Energia Chile

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

Engie Energia Chile could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

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.

Is There Some Revenue Growth Forecasted For Engie Energia Chile?

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.

Retrospectively, the last year delivered a frustrating 6.5% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 22% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 7.6% per annum as estimated by the four analysts watching the company. Meanwhile, the broader industry is forecast to expand by 0.9% per annum, which paints a poor picture.

In light of this, it's somewhat alarming that Engie Energia Chile's P/S sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Final Word

Its shares have lifted substantially and now Engie Energia Chile's P/S is back within range of the industry median. 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.

Our check of Engie Energia Chile's analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

You need to take note of risks, for example - Engie Energia Chile has 2 warning signs (and 1 which is potentially serious) we think you should know about.

If these risks are making you reconsider your opinion on Engie Energia Chile, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.