Fuel Tech, Inc.'s (NASDAQ:FTEK) Popularity With Investors Is Under Threat From Overpricing
With a median price-to-sales (or "P/S") ratio of close to 1.1x in the Commercial Services industry in the United States, you could be forgiven for feeling indifferent about Fuel Tech, Inc.'s (NASDAQ:FTEK) P/S ratio of 1.5x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Check out our latest analysis for Fuel Tech
What Does Fuel Tech's Recent Performance Look Like?
There hasn't been much to differentiate Fuel Tech's and the industry's revenue growth lately. Perhaps the market is expecting future revenue performance to show no drastic signs of changing, justifying the P/S being at current levels. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Fuel Tech.
Do Revenue Forecasts Match The P/S Ratio?
In order to justify its P/S ratio, Fuel Tech would need to produce growth that's similar to the industry.
If we review the last year of revenue growth, the company posted a terrific increase of 16%. The latest three year period has also seen a 19% overall rise in revenue, aided extensively by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.
Looking ahead now, revenue is anticipated to climb by 14% each year during the coming three years according to the lone analyst following the company. With the industry predicted to deliver 97% growth per year, the company is positioned for a weaker revenue result.
With this information, we find it interesting that Fuel Tech is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. 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 Bottom Line On Fuel Tech's P/S
Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.
Our look at the analysts forecasts of Fuel Tech's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.
Having said that, be aware Fuel Tech is showing 1 warning sign in our investment analysis, you should know about.
It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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