SMA Solar Technology AG (ETR:S92) Held Back By Insufficient Growth Even After Shares Climb 35%

SMA Solar Technology AG (ETR:S92) shareholders have had their patience rewarded with a 35% share price jump in the last month. The last month tops off a massive increase of 144% in the last year.

Although its price has surged higher, SMA Solar Technology may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.7x, since almost half of all companies in the Electrical industry in Germany have P/S ratios greater than 1.6x and even P/S higher than 4x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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Check out our latest analysis for SMA Solar Technology

What Does SMA Solar Technology's Recent Performance Look Like?

SMA Solar Technology hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

How Is SMA Solar Technology's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as SMA Solar Technology's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 1.3% decrease to the company's top line. Still, the latest three year period has seen an excellent 67% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very 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 0.7% per year as estimated by the five analysts watching the company. With the industry predicted to deliver 11% growth per year, that's a disappointing outcome.

In light of this, it's understandable that SMA Solar Technology's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

SMA Solar Technology's stock price has surged recently, but its but its P/S still remains modest. 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.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that SMA Solar Technology's P/S is on the lower end of the spectrum. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for SMA Solar Technology that you should be aware of.

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.