Investors Still Waiting For A Pull Back In Enapter AG (FRA:H2O)

When close to half the companies in the Electrical industry in Germany have price-to-sales ratios (or "P/S") below 1.6x, you may consider Enapter AG (FRA:H2O) as a stock to potentially avoid with its 2.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

We've discovered 3 warning signs about Enapter. View them for free.

Check out our latest analysis for Enapter

What Does Enapter's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Enapter's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Do Revenue Forecasts Match The High P/S Ratio?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 18%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 149% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 49% each year during the coming three years according to the three analysts following the company. That's shaping up to be materially higher than the 9.1% per year growth forecast for the broader industry.

With this information, we can see why Enapter is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our look into Enapter shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You should always think about risks. Case in point, we've spotted 3 warning signs for Enapter you should be aware of, and 1 of them is concerning.

If you're unsure about the strength of Enapter's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.