With a price-to-sales (or “P/S”) ratio of 2.3x NIO Inc. (NYSE:NIO) may be sending very bullish signals at the moment, given that almost half of all the Auto companies in the United States have P/S ratios greater than 4.9x and even P/S higher than 10x are not unusual. However, the P/S might be quite low for a reason and it requires further investigation to determine if it’s justified.
See our latest analysis for NIO
How Has NIO Performed Recently?
With revenue growth that’s inferior to most other companies of late, NIO has been relatively sluggish. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If you still like the company, you’d be hoping revenue doesn’t get any worse and that you could pick up some stock while it’s out of favour.
Keen to find out how analysts think NIO’s future stacks up against the industry? In that case, our free report is a great place to start.
Is There Any Revenue Growth Forecasted For NIO?
There’s an inherent assumption that a company should far underperform the industry for P/S ratios like NIO’s to be considered reasonable.
Retrospectively, the last year delivered an exceptional 36% gain to the company’s top line. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.
Turning to the outlook, the next three years should generate growth of 45% each year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 247% each year, which is noticeably more attractive.
With this in consideration, its clear as to why NIO’s P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Key Takeaway
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.
As expected, our analysis of NIO’s analyst forecasts confirms that the company’s underwhelming revenue outlook is a major contributor to its low P/S. At this stage investors feel the potential for an improvement in revenue isn’t great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
A lot of potential risks can sit within a company’s balance sheet. Take a look at our free balance sheet analysis for NIO with six simple checks on some of these key factors.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here