What You Can Learn From ENCE Energía y Celulosa, S.A.'s (BME:ENC) P/S

There wouldn't be many who think ENCE Energía y Celulosa, S.A.'s (BME:ENC) price-to-sales (or "P/S") ratio of 0.9x is worth a mention when the median P/S for the Forestry industry in Spain is similar at about 0.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for ENCE Energía y Celulosa

What Does ENCE Energía y Celulosa's Recent Performance Look Like?

ENCE Energía y Celulosa has been doing a reasonable job lately as its revenue hasn't declined as much as most other companies. One possibility is that the P/S ratio is moderate because investors think this relatively better revenue performance might be about to evaporate. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. But at the very least, you'd be hoping the company doesn't fall back into the pack if your plan is to pick up some stock while it's not in favour.

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

How Is ENCE Energía y Celulosa's Revenue Growth Trending?

In order to justify its P/S ratio, ENCE Energía y Celulosa would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 9.9%. Regardless, revenue has managed to lift by a handy 15% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Looking ahead now, revenue is anticipated to climb by 4.2% each year during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 4.9% per annum, which is not materially different.

With this information, we can see why ENCE Energía y Celulosa is trading at a fairly similar P/S to the industry. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Key Takeaway

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.

Our look at ENCE Energía y Celulosa's revenue growth estimates show that its P/S is about what we expect, as both metrics follow closely with the industry averages. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.

It is also worth noting that we have found 4 warning signs for ENCE Energía y Celulosa (2 shouldn't be ignored!) that you need to take into consideration.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.