What SSE plc's (LON:SSE) P/S Is Not Telling You

When you see that almost half of the companies in the Electric Utilities industry in the United Kingdom have price-to-sales ratios (or "P/S") below 0.9x, SSE plc (LON:SSE) looks to be giving off some sell signals with its 1.9x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

Check out our latest analysis for SSE

What Does SSE's Recent Performance Look Like?

SSE's negative revenue growth of late has neither been better nor worse than most other companies. One possibility is that the P/S ratio is high because investors think the company can turn things around and break free from the broader downward trend in revenue. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think SSE's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For SSE?

The only time you'd be truly comfortable seeing a P/S as high as SSE's is when the company's growth is on track to outshine the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 16%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 53% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 0.5% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 2.5% each year, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that SSE's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

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.

We've concluded that SSE currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with SSE, and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on SSE, 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.

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