Stock Analysis

What Invinity Energy Systems plc's (LON:IES) P/S Is Not Telling You

Source: Shutterstock

With a price-to-sales (or "P/S") ratio of 5.1x Invinity Energy Systems plc (LON:IES) may be sending very bearish signals at the moment, given that almost half of all the Electrical companies in the United Kingdom have P/S ratios under 3x and even P/S lower than 0.9x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Invinity Energy Systems

AIM:IES Price to Sales Ratio vs Industry October 3rd 2023

How Invinity Energy Systems Has Been Performing

Invinity Energy Systems certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered an explosive gain to the company's top line. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 120% per annum over the next three years. With the industry predicted to deliver 111% growth per year, the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that Invinity Energy Systems' P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

What Does Invinity Energy Systems' 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.

Analysts are forecasting Invinity Energy Systems' revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Invinity Energy Systems (of which 2 are potentially serious!) 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.

Valuation is complex, but we're helping make it simple.

Find out whether Invinity Energy Systems is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis