ADS-TEC Energy PLC's (NASDAQ:ADSE) price-to-sales (or "P/S") ratio of 3.7x may not look like an appealing investment opportunity when you consider close to half the companies in the Electrical industry in the United States have P/S ratios below 1.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

What Does ADS-TEC Energy's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, ADS-TEC Energy has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

What Are Revenue Growth Metrics Telling Us About The High P/S?

The only time you'd be truly comfortable seeing a P/S as high as ADS-TEC Energy's is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that the company grew revenue by an impressive 168% last year. The latest three year period has also seen an excellent 124% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 60% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 12%, which is noticeably less attractive.

In light of this, it's understandable that ADS-TEC Energy's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more 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 ADS-TEC Energy's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You should always think about risks. Case in point, we've spotted 2 warning signs for ADS-TEC Energy you should be aware of, and 1 of them is concerning.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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