Some Shareholders Feeling Restless Over MTU Aero Engines AG's (ETR:MTX) P/S Ratio

When close to half the companies in the Aerospace & Defense industry in Germany have price-to-sales ratios (or "P/S") below 1.8x, you may consider MTU Aero Engines AG (ETR:MTX) as a stock to potentially avoid with its 2.4x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for MTU Aero Engines

What Does MTU Aero Engines' P/S Mean For Shareholders?

MTU Aero Engines certainly has been doing a good job lately as it's been growing revenue more 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 MTU Aero Engines.

How Is MTU Aero Engines' Revenue Growth Trending?

In order to justify its P/S ratio, MTU Aero Engines would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered an exceptional 35% gain to the company's top line. The latest three year period has also seen an excellent 74% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 10% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 13% per year, which is noticeably more attractive.

In light of this, it's alarming that MTU Aero Engines' P/S sits above the majority of other companies. 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. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Final Word

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've concluded that MTU Aero Engines currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for MTU Aero Engines with six simple checks on some of these key factors.

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.