Getting In Cheap On Cleanaway Waste Management Limited (ASX:CWY) Is Unlikely

It's not a stretch to say that Cleanaway Waste Management Limited's (ASX:CWY) price-to-sales (or "P/S") ratio of 1.6x seems quite "middle-of-the-road" for Commercial Services companies in Australia, seeing as it matches the P/S ratio of the wider industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Cleanaway Waste Management

What Does Cleanaway Waste Management's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Cleanaway Waste Management has been relatively sluggish. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Cleanaway Waste Management will help you uncover what's on the horizon.

How Is Cleanaway Waste Management's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Cleanaway Waste Management's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.8% last year. The latest three year period has also seen an excellent 58% overall rise in revenue, aided somewhat by its short-term performance. 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 3.9% per year as estimated by the twelve analysts watching the company. With the industry predicted to deliver 6.0% growth per annum, the company is positioned for a weaker revenue result.

In light of this, it's curious that Cleanaway Waste Management's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Cleanaway Waste Management's P/S?

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

Given that Cleanaway Waste Management's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Cleanaway Waste Management, and understanding these should be part of your investment process.

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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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.