Cenntro Inc. (NASDAQ:CENN) shares have continued their recent momentum with a 27% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 41% over that time.
After such a large jump in price, given close to half the companies operating in the United States' Auto industry have price-to-sales ratios (or "P/S") below 1.7x, you may consider Cenntro as a stock to potentially avoid with its 2.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.
NasdaqCM:CENN Price to Sales Ratio vs Industry June 4th 2024
How Cenntro Has Been Performing
Recent times have been quite advantageous for Cenntro as its revenue has been rising very briskly. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Cenntro will help you shine a light on its historical performance.
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 Cenntro's to be considered reasonable.
Taking a look back first, we see that the company grew revenue by an impressive 108% last year. The latest three year period has also seen an excellent 279% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.
This is in contrast to the rest of the industry, which is expected to grow by 13% over the next year, materially lower than the company's recent medium-term annualised growth rates.
With this in consideration, it's not hard to understand why Cenntro's P/S is high relative to its industry peers. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.
The Bottom Line On Cenntro's P/S
Cenntro shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.
We've established that Cenntro maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.
Before you take the next step, you should know about the 5 warning signs for Cenntro (2 make us uncomfortable!) that we have uncovered.
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).
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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.