There wouldn't be many who think Regal Rexnord Corporation's (NYSE:RRX) price-to-sales (or "P/S") ratio of 1.7x is worth a mention when the median P/S for the Electrical industry in the United States is similar at about 1.8x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

How Regal Rexnord Has Been Performing

Regal Rexnord's revenue growth of late has been pretty similar to most other companies. The P/S ratio is probably moderate because investors think this modest revenue performance will continue. Those who are bullish on Regal Rexnord will be hoping that revenue performance can pick up, so that they can pick up the stock at a slightly lower valuation.

Is There Some Revenue Growth Forecasted For Regal Rexnord?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Regal Rexnord's to be considered reasonable.

Retrospectively, the last year delivered a decent 14% gain to the company's revenues. The latest three year period has also seen an excellent 96% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 2.2% each year over the next three years. With the industry predicted to deliver 24% growth each year, the company is positioned for a weaker revenue result.

With this information, we find it interesting that Regal Rexnord is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our look at the analysts forecasts of Regal Rexnord's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

You always need to take note of risks, for example - Regal Rexnord has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Regal Rexnord'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.