NRG Energy, Inc. (NYSE:NRG) is doing what it can to lift shares

NRG Energy, Inc.’s (NYSE:NRG)’s price-to-sales (or “P/S”) ratio of 0.7x may look like a pretty appealing investment opportunity when you consider that close to half of the companies in the U.S. electric utility industry have P / S ratio greater than 2.4x. However, the P/S may be low for a reason and it requires further investigation to determine if it is justified.

See our latest analysis for NRG Energy

What does NRG Energy’s recent performance look like?

Recent times have not been good for NRG Energy, as its revenue has fallen faster than most other companies. Many seem to expect the dismal earnings performance to continue, which has depressed P/S. If you still like the company, you’ll want to see its revenue trajectory reverse before making any decisions. If not, then existing shareholders are likely to struggle to get excited about the future direction of the share price.

Interested in finding out how analysts think NRG Energy’s future holds for the industry? If so, ours is free report is a good place to start.

What do earnings growth metrics tell us about the low P/S?

NRG Energy’s P/S ratio would be typical of a company that is expected to deliver only limited growth and, more importantly, underperform the industry.

Once you take a look back, the company’s revenue growth last year was nothing to get excited about as it posted a disappointing 5.9% decline. Regardless, revenue has managed to increase by a practical 28% overall from three years ago, thanks to the previous period of growth. Although they would have preferred to keep the race going, the shareholders would therefore be fairly satisfied with the medium-term revenue growth.

Turning to the future, estimates from the six analysts covering the company suggest revenue should grow 6.2% annually over the next three years. Meanwhile, the rest of the industry is expected to grow by 5.1% per year, which is not significantly different.

In light of this, it is peculiar that NRG Energy’s P/S is below the majority of other companies. It may be that most investors are not convinced that the company can achieve future growth expectations.

What can we learn from NRG Energy’s P/S?

While the price-to-sales ratio shouldn’t be the deciding factor in whether or not you buy a stock, it’s a pretty capable barometer of revenue expectations.

We have seen that NRG Energy is currently trading at a lower than expected P/S as its expected growth is in line with the broader industry. When we see mid-term revenue growth like this, we assume it must be the potential risks that are putting pressure on the P/S ratio. Perhaps investors are concerned that the company may underperform compared to forecasts in the short term.

And what about other risks? All companies have them and we have seen them 2 warning signs for NRG Energy (of which 1 is significant!) you should know.

If strong companies with profits tickle your fancy, then check this out free list of interesting companies that trade at a low P/E (but have proven they can grow earnings).

Do you have feedback on this article? Worried about the content? Get in touch with us directly. Alternatively, you can email the editors (at) simplywallst.com.

This article by Simply Wall St is of a general nature. We only provide commentary based on historical data and analyst forecasts 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 shares and does not take into account your goals or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in any listed stocks.