What Array Technologies, Inc.'s (NASDAQ:ARRY) 25% Share Price Gain Is Not Telling You

Array Technologies, Inc. (NASDAQ:ARRY) shareholders are no doubt pleased to see that the share price has bounced 25% in the last month, although it is still struggling to make up recently lost ground. The last month tops off a massive increase of 151% in the last year.

Although its price has surged higher, there still wouldn't be many who think Array Technologies' price-to-sales (or "P/S") ratio of 2x is worth a mention when the median P/S in the United States' Electrical industry is similar at about 1.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Array Technologies

How Has Array Technologies Performed Recently?

With revenue growth that's superior to most other companies of late, Array Technologies has been doing relatively well. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Array Technologies' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 92%. The strong recent performance means it was also able to grow revenue by 153% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 17% per year during the coming three years according to the analysts following the company. With the industry predicted to deliver 33% growth each year, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Array Technologies' P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Array Technologies appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in 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.

When you consider that Array Technologies' revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Array Technologies with six simple checks on some of these key factors.

If you're unsure about the strength of Array Technologies' 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.