When close to half the companies in the Aerospace & Defense industry in the United States have price-to-sales ratios (or "P/S") below 2.3x, you may consider EHang Holdings Limited (NASDAQ:EH) as a stock to avoid entirely with its 48.1x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
See our latest analysis for EHang Holdings
What Does EHang Holdings' P/S Mean For Shareholders?
Recent times have been advantageous for EHang Holdings as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.
Keen to find out how analysts think EHang Holdings' future stacks up against the industry? In that case, our free report is a great place to start.
Is There Enough Revenue Growth Forecasted For EHang Holdings?
The only time you'd be truly comfortable seeing a P/S as steep as EHang Holdings' is when the company's growth is on track to outshine the industry decidedly.
Taking a look back first, we see that the company grew revenue by an impressive 158% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 15% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Looking ahead now, revenue is anticipated to remain buoyant, climbing by 218% during the coming year according to the six analysts following the company. Meanwhile, the broader industry is forecast to contract by 2.9%, which would indicate the company is doing very well.
In light of this, it's understandable that EHang Holdings' P/S sits above the majority of other companies. Right now, investors are willing to pay more for a stock that is shaping up to buck the trend of the broader industry going backwards.
The Key Takeaway
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.
We can see that EHang Holdings maintains its high P/S on the strength of its forecast growth potentially beating a struggling industry, as expected. At this stage investors feel the potential for a deterioration in revenue is remote enough to justify paying a premium in the form of a high P/S. Questions could still raised over whether this level of outperformance can continue in the context of a a tumultuous industry climate. Assuming the company's outlook remains unchanged, the share price is likely to be supported by prospective buyers.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for EHang Holdings that you should be aware of.
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).
Valuation is complex, but we're here to simplify it.
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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.
