More Unpleasant Surprises Could Be In Store For Talen Energy Corporation's (NASDAQ:TLN) Shares After Tumbling 25%

The Talen Energy Corporation (NASDAQ:TLN) share price has fared very poorly over the last month, falling by a substantial 25%. The good news is that in the last year, the stock has shone bright like a diamond, gaining 107%.

Even after such a large drop in price, when almost half of the companies in the United States' Renewable Energy industry have price-to-sales ratios (or "P/S") below 2.2x, you may still consider Talen Energy as a stock probably not worth researching with its 3.9x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Talen Energy

How Has Talen Energy Performed Recently?

While the industry has experienced revenue growth lately, Talen Energy's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Talen Energy.

Do Revenue Forecasts Match The High P/S Ratio?

Talen 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.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 17% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 8.3% per annum over the next three years. With the industry predicted to deliver 8.6% growth each year, the company is positioned for a comparable revenue result.

With this information, we find it interesting that Talen Energy is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

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

There's still some elevation in Talen Energy's P/S, even if the same can't be said for its share price recently. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Analysts are forecasting Talen Energy's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. A positive change is needed in order to justify the current price-to-sales ratio.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Talen Energy that you need to be mindful of.

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.