Subdued Growth No Barrier To Enagás, S.A.'s (BME:ENG) Price

Enagás, S.A.'s (BME:ENG) price-to-sales (or "P/S") ratio of 3.7x may look like a poor investment opportunity when you consider close to half the companies in the Gas Utilities industry in Spain have P/S ratios below 1.3x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Enagás

What Does Enagás' P/S Mean For Shareholders?

Recent times have been more advantageous for Enagás as its revenue hasn't fallen as much as the rest of the industry. Perhaps the market is expecting the company to continue to outperform the industry, which has propped up the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price, especially if revenue continues to dissolve.

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

How Is Enagás' Revenue Growth Trending?

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

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. This isn't what shareholders were looking for as it means they've been left with a 7.2% decline in revenue over the last three years in total. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to slump, contracting by 3.4% per year during the coming three years according to the analysts following the company. With the industry predicted to deliver 1.6% growth per annum, that's a disappointing outcome.

With this information, we find it concerning that Enagás is trading at a P/S higher than the industry. 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 these declining revenues are likely to weigh heavily on the share price eventually.

What Does Enagás' P/S Mean For Investors?

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.

We've established that Enagás currently trades on a much higher than expected P/S for a company whose revenues are forecast to decline. In cases like this where we see revenue decline on the horizon, we suspect the share price is at risk of following suit, bringing back the high P/S into the realms of suitability. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 2 warning signs for Enagás (1 is a bit concerning!) that you should be aware of.

If you're unsure about the strength of Enagás' 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.