After Leaping 36% ACWA Power Company (TADAWUL:2082) Shares Are Not Flying Under The Radar

ACWA Power Company (TADAWUL:2082) shareholders have had their patience rewarded with a 36% share price jump in the last month. The annual gain comes to 156% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given around half the companies in Saudi Arabia's Renewable Energy industry have price-to-sales ratios (or "P/S") below 2.2x, you may consider ACWA Power as a stock to avoid entirely with its 42.4x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for ACWA Power

What Does ACWA Power's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, ACWA Power has been relatively sluggish. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think ACWA Power's future stacks up against the industry? In that case, our free report is a great place to start.

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like ACWA Power's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 16% last year. As a result, it also grew revenue by 26% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 16% per year over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 8.9% each year, which is noticeably less attractive.

In light of this, it's understandable that ACWA Power's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

ACWA Power's P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that ACWA Power maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Renewable Energy industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

And what about other risks? Every company has them, and we've spotted 1 warning sign for ACWA Power you should know about.

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.