Kenon Holdings Ltd.'s (TLV:KEN) Shares Not Telling The Full Story

You may think that with a price-to-sales (or "P/S") ratio of 1.6x Kenon Holdings Ltd. (TLV:KEN) is definitely a stock worth checking out, seeing as almost half of all the Renewable Energy companies in Israel have P/S ratios greater than 8.9x and even P/S above 17x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Kenon Holdings

How Kenon Holdings Has Been Performing

The revenue growth achieved at Kenon Holdings over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Kenon Holdings will help you shine a light on its historical performance.

How Is Kenon Holdings' Revenue Growth Trending?

Kenon Holdings' P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 21% last year. The latest three year period has also seen an excellent 79% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing that to the industry, which is only predicted to deliver 13% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

In light of this, it's peculiar that Kenon Holdings' P/S sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

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.

We're very surprised to see Kenon Holdings currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 3 warning signs for Kenon Holdings you should be aware of, and 2 of them make us uncomfortable.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.