Eneco Energy Limited (SGX:R14) shareholders would be excited to see that the share price has had a great month, posting a 129% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 33%.

After such a large jump in price, when almost half of the companies in Singapore's Logistics industry have price-to-sales ratios (or "P/S") below 0.5x, you may consider Eneco Energy as a stock probably not worth researching with its 1.2x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How Has Eneco Energy Performed Recently?

For instance, Eneco Energy's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, 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.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered a frustrating 4.5% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 17% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 13% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Eneco Energy's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Eneco Energy shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

We've established that Eneco Energy currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

You should always think about risks. Case in point, we've spotted 4 warning signs for Eneco Energy you should be aware of, and 1 of them is a bit unpleasant.

If you're unsure about the strength of Eneco Energy'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.