ENEA S.A.'s (WSE:ENA) 26% Price Boost Is Out Of Tune With Revenues

The ENEA S.A. (WSE:ENA) share price has done very well over the last month, posting an excellent gain of 26%. The last 30 days bring the annual gain to a very sharp 54%.

Although its price has surged higher, it's still not a stretch to say that ENEA's price-to-sales (or "P/S") ratio of 0.1x right now seems quite "middle-of-the-road" compared to the Electric Utilities industry in Poland, where the median P/S ratio is around 0.2x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for ENEA

How ENEA Has Been Performing

With revenue growth that's superior to most other companies of late, ENEA has been doing relatively well. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

How Is ENEA's Revenue Growth Trending?

ENEA's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, we see that the company grew revenue by an impressive 40% last year. The latest three year period has also seen an excellent 129% 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.

Shifting to the future, estimates from the five analysts covering the company are not good at all, suggesting revenue should decline by 18% over the next year. With the rest of the industry predicted to shrink by 2.8%, it's a sub-optimal result.

With this information, it's perhaps strange that ENEA is trading at a fairly similar P/S in comparison. With revenue going quickly in reverse, it's not guaranteed that the P/S has found a floor yet. There's potential for the P/S to fall to lower levels if the company doesn't improve its top-line growth.

What We Can Learn From ENEA's P/S?

ENEA's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

ENEA currently trades on a higher P/S than expected based on revenue decline, even more so since its revenue forecast is even worse than the struggling industry. It's not unusual in cases where revenue growth is poor, that the share price declines, sending the moderate P/S lower relative to the industry. We also have our reservations about the company's ability to sustain this level of performance amidst the challenging industry conditions. This presents a risk to investors if the P/S were to decline to a level that more accurately reflects the company's revenue prospects.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for ENEA with six simple checks.

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.