Why We're Not Concerned Yet About McPhy Energy S.A.'s (EPA:MCPHY) 26% Share Price Plunge

The McPhy Energy S.A. (EPA:MCPHY) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. For any long-term shareholders, the last month ends a year to forget by locking in a 73% 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 not worth researching with its 3.5x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for McPhy Energy

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

With revenue growth that's superior to most other companies of late, McPhy Energy has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. 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.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, McPhy Energy would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 17% gain to the company's top line. Pleasingly, revenue has also lifted 37% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 80% each year over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 6.3% per annum, which is noticeably less attractive.

With this in mind, it's not hard to understand why McPhy Energy's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

McPhy Energy's shares may have suffered, but its P/S remains high. 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.

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. 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.

And what about other risks? Every company has them, and we've spotted 5 warning signs for McPhy Energy (of which 2 are a bit unpleasant!) you should know about.

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.

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