What You Can Learn From Invinity Energy Systems plc's (LON:IES) P/S After Its 29% Share Price Crash

To the annoyance of some shareholders, Invinity Energy Systems plc (LON:IES) shares are down a considerable 29% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 61% loss during that time.

Even after such a large drop in price, you could still be forgiven for thinking Invinity Energy Systems is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.6x, considering almost half the companies in the United Kingdom's Electrical industry have P/S ratios below 1.3x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Invinity Energy Systems

What Does Invinity Energy Systems' P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Invinity Energy Systems' revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. 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 Invinity Energy Systems will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Invinity Energy Systems' is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 46%. The latest three year period has seen an incredible overall rise in revenue, a stark contrast to the last 12 months. Accordingly, shareholders will be pleased, but also have some serious questions to ponder about the last 12 months.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 139% per year over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 44% each year, which is noticeably less attractive.

With this information, we can see why Invinity Energy Systems 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.

What We Can Learn From Invinity Energy Systems' P/S?

A significant share price dive has done very little to deflate Invinity Energy Systems' very lofty P/S. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Invinity Energy Systems' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 3 warning signs for Invinity Energy Systems (1 doesn't sit too well with us!) that we have uncovered.

If these risks are making you reconsider your opinion on Invinity Energy Systems, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.