It's A Story Of Risk Vs Reward With Zeo Energy Corp. (NASDAQ:ZEO)

You may think that with a price-to-sales (or "P/S") ratio of 0.4x Zeo Energy Corp. (NASDAQ:ZEO) is a stock worth checking out, seeing as almost half of all the Electrical companies in the United States have P/S ratios greater than 1.8x and even P/S higher than 5x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Zeo Energy

How Zeo Energy Has Been Performing

For example, consider that Zeo Energy's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on Zeo Energy will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Zeo Energy's earnings, revenue and cash flow.

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

Zeo Energy's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 34%. Even so, admirably revenue has lifted 216% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 16% shows it's noticeably more attractive.

In light of this, it's peculiar that Zeo Energy's P/S sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

What Does Zeo Energy's P/S Mean For Investors?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We're very surprised to see Zeo Energy currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. Potential investors that are sceptical over continued revenue performance may be preventing the P/S ratio from matching previous strong performance. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

Before you settle on your opinion, we've discovered 2 warning signs for Zeo Energy that you should be aware of.

If these risks are making you reconsider your opinion on Zeo Energy, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.