There's Reason For Concern Over SIMEC Atlantis Energy Limited's (LON:SAE) Massive 114% Price Jump

SIMEC Atlantis Energy Limited (LON:SAE) shareholders have had their patience rewarded with a 114% share price jump in the last month. The annual gain comes to 104% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about SIMEC Atlantis Energy's P/S ratio of 2.3x, since the median price-to-sales (or "P/S") ratio for the Electrical industry in the United Kingdom is also close to 2.1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Check out our latest analysis for SIMEC Atlantis Energy

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

SIMEC Atlantis Energy could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. However, if this isn't the case, investors might get caught out paying too much for the stock.

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How Is SIMEC Atlantis Energy's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like SIMEC Atlantis Energy's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 5.4% decrease to the company's top line. Still, the latest three year period has seen an excellent 93% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 4.8% each year during the coming three years according to the dual analysts following the company. With the industry predicted to deliver 43% growth each year, the company is positioned for a weaker revenue result.

With this information, we find it interesting that SIMEC Atlantis Energy is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On SIMEC Atlantis Energy's P/S

Its shares have lifted substantially and now SIMEC Atlantis Energy's P/S is back within range of the industry median. 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.

Given that SIMEC Atlantis Energy's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Before you take the next step, you should know about the 2 warning signs for SIMEC Atlantis Energy (1 makes us a bit uncomfortable!) that we have uncovered.

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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.