EchoStar Corporation's (NASDAQ:SATS) Shares Climb 29% But Its Business Is Yet to Catch Up

EchoStar Corporation (NASDAQ:SATS) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. The last month tops off a massive increase of 117% in the last year.

Although its price has surged higher, it's still not a stretch to say that EchoStar's price-to-sales (or "P/S") ratio of 0.5x right now seems quite "middle-of-the-road" compared to the Media industry in the United States, where the median P/S ratio is around 0.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for EchoStar

How Has EchoStar Performed Recently?

EchoStar hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

Keen to find out how analysts think EchoStar'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 P/S?

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

Retrospectively, the last year delivered a frustrating 47% decrease to the company's top line. The latest three year period has seen an incredible overall rise in revenue, a stark contrast to the last 12 months. So while the company has done a great job in the past, it's somewhat concerning to see revenue growth decline so harshly.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue growth is heading into negative territory, declining 5.3% per annum over the next three years. Meanwhile, the broader industry is forecast to expand by 4.7% per annum, which paints a poor picture.

In light of this, it's somewhat alarming that EchoStar's P/S sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

What We Can Learn From EchoStar's P/S?

Its shares have lifted substantially and now EchoStar's P/S is back within range of the industry median. 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 check of EchoStar's analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

It is also worth noting that we have found 1 warning sign for EchoStar that you need to take into consideration.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.