Market Might Still Lack Some Conviction On MPC Energy Solutions N.V. (OB:MPCES) Even After 39% Share Price Boost

MPC Energy Solutions N.V. (OB:MPCES) shareholders would be excited to see that the share price has had a great month, posting a 39% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 22% is also fairly reasonable.

Even after such a large jump in price, MPC Energy Solutions' price-to-sales (or "P/S") ratio of 2.5x might still make it look like a buy right now compared to the Renewable Energy industry in Norway, where around half of the companies have P/S ratios above 3.5x and even P/S above 11x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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View our latest analysis for MPC Energy Solutions

What Does MPC Energy Solutions' P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, MPC Energy Solutions' revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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Do Revenue Forecasts Match The Low P/S Ratio?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.8%. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, despite the drawbacks experienced in the last 12 months. So while the company has done a great job in the past, it's somewhat concerning to see revenue growth decline so harshly.

Turning to the outlook, the next year should generate growth of 50% as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 4.6% growth forecast for the broader industry.

With this information, we find it odd that MPC Energy Solutions is trading at a P/S lower than the industry. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

The latest share price surge wasn't enough to lift MPC Energy Solutions' P/S close to the industry median. 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 look at MPC Energy Solutions' revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. The reason for this depressed P/S could potentially be found in the risks the market is pricing in. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

Before you take the next step, you should know about the 3 warning signs for MPC Energy Solutions (1 is potentially serious!) that we have uncovered.

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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