What You Can Learn From ACWA Power Company's (TADAWUL:2082) P/S

When close to half the companies in the Renewable Energy industry in Saudi Arabia have price-to-sales ratios (or "P/S") below 2.3x, you may consider ACWA Power Company (TADAWUL:2082) as a stock to avoid entirely with its 27.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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Check out our latest analysis for ACWA Power

How ACWA Power Has Been Performing

With revenue growth that's superior to most other companies of late, ACWA Power has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

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?

In order to justify its P/S ratio, ACWA Power would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 17% last year. The strong recent performance means it was also able to grow revenue by 36% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 14% over the next year. That's shaping up to be materially higher than the 11% growth forecast for the broader industry.

With this information, we can see why ACWA Power is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From ACWA Power's P/S?

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 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. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You should always think about risks. Case in point, we've spotted 3 warning signs for ACWA Power you should be aware of, and 1 of them is a bit unpleasant.

If you're unsure about the strength of ACWA Power's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.