It's A Story Of Risk Vs Reward With NRG Energy, Inc. (NYSE:NRG)

When you see that almost half of the companies in the Electric Utilities industry in the United States have price-to-sales ratios (or "P/S") above 2x, NRG Energy, Inc. (NYSE:NRG) looks to be giving off some buy signals with its 0.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for NRG Energy

How Has NRG Energy Performed Recently?

With revenue that's retreating more than the industry's average of late, NRG Energy has been very sluggish. The P/S ratio is probably low because investors think this poor revenue performance isn't going to improve at all. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the revenue slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

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

How Is NRG Energy's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as NRG Energy's is when the company's growth is on track to lag 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 9.1%. Even so, admirably revenue has lifted 88% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 4.3% each year over the next three years. With the industry predicted to deliver 4.9% growth each year, the company is positioned for a comparable revenue result.

With this information, we find it odd that NRG Energy is trading at a P/S lower than the industry. It may be that most investors are not convinced the company can achieve future growth expectations.

What We Can Learn From NRG Energy's P/S?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

It looks to us like the P/S figures for NRG Energy remain low despite growth that is expected to be in line with other companies in the industry. The low P/S could be an indication that the revenue growth estimates are being questioned by the market. It appears some are indeed anticipating revenue instability, because these conditions should normally provide more support to the share price.

You should always think about risks. Case in point, we've spotted 3 warning signs for NRG Energy you should be aware of, and 2 of them are potentially serious.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com