Unpleasant Surprises Could Be In Store For Regal Rexnord Corporation's (NYSE:RRX) Shares

There wouldn't be many who think Regal Rexnord Corporation's (NYSE:RRX) price-to-sales (or "P/S") ratio of 1.6x is worth a mention when the median P/S for the Electrical industry in the United States is similar at about 2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Regal Rexnord

What Does Regal Rexnord's Recent Performance Look Like?

Regal Rexnord could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

How Is Regal Rexnord's Revenue Growth Trending?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 5.0% last year. The latest three year period has also seen an excellent 83% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 1.8% per year as estimated by the ten analysts watching the company. With the industry predicted to deliver 24% growth each year, the company is positioned for a weaker revenue result.

In light of this, it's curious that Regal Rexnord's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From Regal Rexnord's P/S?

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.

Our look at the analysts forecasts of Regal Rexnord's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Regal Rexnord, and understanding should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.