Meridian Energy Limited's (NZSE:MEL) Business Is Yet to Catch Up With Its Share Price

With a price-to-sales (or "P/S") ratio of 4.5x Meridian Energy Limited (NZSE:MEL) may be sending bearish signals at the moment, given that almost half of all Renewable Energy companies in New Zealand have P/S ratios under 3.7x and even P/S lower than 1.6x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Meridian Energy

What Does Meridian Energy's Recent Performance Look Like?

Meridian Energy's negative revenue growth of late has neither been better nor worse than most other companies. Perhaps the market is expecting the company to reverse its fortunes and beat out a struggling industry in the future, elevating the P/S. If not, then existing shareholders may be a little nervous about the viability of the share price.

Keen to find out how analysts think Meridian Energy'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 Meridian Energy?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 15%. As a result, revenue from three years ago have also fallen 5.4% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 10% each year during the coming three years according to the four analysts following the company. That's shaping up to be materially lower than the 770% each year growth forecast for the broader industry.

With this information, we find it concerning that Meridian Energy is trading at a P/S higher than the industry. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Meridian Energy's P/S Mean For Investors?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've concluded that Meridian Energy currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 4 warning signs for Meridian Energy you should be aware of, and 2 of them are a bit concerning.

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.