Auren Energia S.A.'s (BVMF:AURE3) Revenues Are Not Doing Enough For Some Investors

Auren Energia S.A.'s (BVMF:AURE3) price-to-sales (or "P/S") ratio of 1x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Renewable Energy industry in Brazil have P/S ratios greater than 2.2x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Auren Energia

What Does Auren Energia's P/S Mean For Shareholders?

Auren Energia certainly has been doing a good job lately as it's been growing revenue more than most other companies. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as Auren Energia's is when the company's growth is on track to lag the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 90%. Pleasingly, revenue has also lifted 161% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to slump, contracting by 0.01% per annum during the coming three years according to the ten analysts following the company. With the industry predicted to deliver 13% growth per annum, that's a disappointing outcome.

In light of this, it's understandable that Auren Energia's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

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.

As we suspected, our examination of Auren Energia's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about this 1 warning sign we've spotted with Auren Energia.

If you're unsure about the strength of Auren Energia's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.