What You Can Learn From Pennon Group Plc's (LON:PNN) P/S

With a median price-to-sales (or "P/S") ratio of close to 1.8x in the Water Utilities industry in the United Kingdom, you could be forgiven for feeling indifferent about Pennon Group Plc's (LON:PNN) P/S ratio of 2.1x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Pennon Group

How Pennon Group Has Been Performing

With revenue growth that's superior to most other companies of late, Pennon Group has been doing relatively well. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Pennon Group.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Pennon Group would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 14%. The latest three year period has also seen an excellent 46% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the eleven analysts covering the company suggest revenue should grow by 8.0% per year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 8.1% per year, which is not materially different.

With this information, we can see why Pennon Group is trading at a fairly similar P/S to the industry. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

What Does Pennon Group's P/S Mean For Investors?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

A Pennon Group's P/S seems about right to us given the knowledge that analysts are forecasting a revenue outlook that is similar to the Water Utilities industry. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. All things considered, if the P/S and revenue estimates contain no major shocks, then it's hard to see the share price moving strongly in either direction in the near future.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Pennon Group (2 are a bit concerning!) that you should be aware of before investing here.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.