When close to half the companies in the Machinery industry in the United States have price-to-sales ratios (or "P/S") below 1.4x, you may consider Chart Industries, Inc. (NYSE:GTLS) as a stock to potentially avoid with its 2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.
See our latest analysis for Chart Industries
NYSE:GTLS Price to Sales Ratio vs Industry January 9th 2024
How Chart Industries Has Been Performing
Recent times have been advantageous for Chart Industries as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chart Industries.
Do Revenue Forecasts Match The High P/S Ratio?
Chart Industries' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.
Taking a look back first, we see that the company grew revenue by an impressive 79% last year. The strong recent performance means it was also able to grow revenue by 134% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Turning to the outlook, the next three years should generate growth of 27% per annum as estimated by the analysts watching the company. That's shaping up to be materially higher than the 6.3% per annum growth forecast for the broader industry.
With this information, we can see why Chart Industries is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
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.
We've established that Chart Industries maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Machinery industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.
And what about other risks? Every company has them, and we've spotted 1 warning sign for Chart Industries 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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