The AES Corporation's (NYSE:AES) 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 the United States have P/S ratios greater than 2.1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

How AES Has Been Performing

Recent times have been more advantageous for AES as its revenue hasn't fallen as much as the rest of the industry. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. But at the very least, you'd be hoping that revenue doesn't fall off a cliff completely if your plan is to pick up some stock while it's out of favour.

Is There Any Revenue Growth Forecasted For AES?

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 4.0% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 19% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 6.8% each year during the coming three years according to the nine analysts following the company. With the industry predicted to deliver 11% growth per year, the company is positioned for a weaker revenue result.

With this information, we can see why AES is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of AES' analyst forecasts revealed that its inferior revenue outlook 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.

Before you settle on your opinion, we've discovered 4 warning signs for AES (1 is concerning!) that you should be aware of.

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.