It's not a stretch to say that Clearway Energy, Inc.'s (NYSE:CWEN.A) price-to-sales (or "P/S") ratio of 2.2x seems quite "middle-of-the-road" for Renewable Energy companies in the United States, seeing as it matches the P/S ratio of the wider industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Clearway Energy

What Does Clearway Energy's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Clearway Energy has been relatively sluggish. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Clearway Energy's Revenue Growth Trending?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 7.5% last year. The solid recent performance means it was also able to grow revenue by 16% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 2.3% per year over the next three years. That's shaping up to be materially lower than the 7.8% per year growth forecast for the broader industry.

With this information, we find it interesting that Clearway Energy is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. 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 Final Word

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.

Given that Clearway Energy's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. 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 need to take note of risks, for example - Clearway Energy has 8 warning signs (and 2 which are a bit unpleasant) we think you should know about.

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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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.