United Utilities Group PLC's (LON:UU.) Share Price Could Signal Some Risk

When you see that almost half of the companies in the Water Utilities industry in the United Kingdom have price-to-sales ratios (or "P/S") below 1.8x, United Utilities Group PLC (LON:UU.) looks to be giving off strong sell signals with its 3.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for United Utilities Group

How Has United Utilities Group Performed Recently?

Recent times haven't been great for United Utilities Group as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on United Utilities Group will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The High P/S?

United Utilities Group's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. That's essentially a continuation of what we've seen over the last three years, as its revenue growth has been virtually non-existent for that entire period. Accordingly, shareholders probably wouldn't have been satisfied with the complete absence of medium-term growth.

Turning to the outlook, the next three years should generate growth of 8.0% per year as estimated by the twelve analysts watching the company. That's shaping up to be similar to the 8.1% each year growth forecast for the broader industry.

In light of this, it's curious that United Utilities Group's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From United Utilities Group's P/S?

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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that United Utilities Group currently trades on a higher than expected P/S. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for United Utilities Group that you need to be mindful of.

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.