McPhy Energy S.A. (EPA:MCPHY) Shares Slammed 28% But Getting In Cheap Might Be Difficult Regardless

To the annoyance of some shareholders, McPhy Energy S.A. (EPA:MCPHY) shares are down a considerable 28% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 86% share price decline.

In spite of the heavy fall in price, when almost half of the companies in France's Machinery industry have price-to-sales ratios (or "P/S") below 0.8x, you may still consider McPhy Energy as a stock probably not worth researching with its 2.5x 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.

Check out our latest analysis for McPhy Energy

What Does McPhy Energy's P/S Mean For Shareholders?

Recent times haven't been great for McPhy Energy as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on McPhy Energy will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For McPhy Energy?

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

If we review the last year of revenue growth, the company posted a terrific increase of 17%. The strong recent performance means it was also able to grow revenue by 37% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 74% per annum during the coming three years according to the five analysts following the company. That's shaping up to be materially higher than the 7.5% each year growth forecast for the broader industry.

With this information, we can see why McPhy Energy is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

There's still some elevation in McPhy Energy's P/S, even if the same can't be said for its share price recently. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that McPhy Energy maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Machinery industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 3 warning signs for McPhy Energy you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.