The Price Is Right For FuelCell Energy, Inc. (NASDAQ:FCEL) Even After Diving 29%

The FuelCell Energy, Inc. (NASDAQ:FCEL) share price has fared very poorly over the last month, falling by a substantial 29%. For any long-term shareholders, the last month ends a year to forget by locking in a 56% share price decline.

Even after such a large drop in price, when almost half of the companies in the United States' Electrical industry have price-to-sales ratios (or "P/S") below 1.6x, you may still consider FuelCell Energy as a stock probably not worth researching with its 3.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for FuelCell Energy

What Does FuelCell Energy's P/S Mean For Shareholders?

FuelCell Energy could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

FuelCell Energy's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 24%. Still, the latest three year period has seen an excellent 48% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 42% each year during the coming three years according to the ten analysts following the company. That's shaping up to be materially higher than the 35% per year growth forecast for the broader industry.

With this in mind, it's not hard to understand why FuelCell Energy's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

FuelCell Energy's P/S remain high even after its stock plunged. 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.

Our look into FuelCell Energy shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 3 warning signs for FuelCell Energy that you should be aware of.

If you're unsure about the strength of FuelCell Energy'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.