When close to half the companies operating in the Renewable Energy industry in the United States have price-to-sales ratios (or "P/S") above 2.1x, you may consider The AES Corporation (NYSE:AES) as an attractive investment with its 1.1x P/S ratio.   However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.  

NYSE:AES Price to Sales Ratio vs Industry May 6th 2024

What Does AES' P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, AES' revenue has gone into reverse gear, which is not great.   Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon.  If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.    

Keen to find out how analysts think AES' future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The Low P/S Ratio?  

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

Retrospectively, the last year delivered a frustrating 3.8% decrease to the company's top line.   Regardless, revenue has managed to lift by a handy 26% 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.  

Looking ahead now, revenue is anticipated to climb by 4.3% each year during the coming three years according to the ten analysts following the company.  With the industry predicted to deliver 5.1% growth  per year, the company is positioned for a comparable revenue result.

With this information, we find it odd that AES 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.  

The Bottom Line On AES' P/S

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 examination of AES' revealed that its P/S remains low despite analyst forecasts of revenue growth matching the wider industry.  When we see middle-of-the-road revenue growth like this, we assume it must be the potential risks that are what is placing pressure on the P/S ratio.  It appears some are indeed anticipating revenue instability, because these conditions should normally provide more support to the share price.    

We don't want to rain on the parade too much, but we did also find 4 warning signs for AES (1 is significant!) that you need to be mindful of.  

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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