Aecon Group Inc.'s (TSE:ARE) Shares Leap 30% Yet They're Still Not Telling The Full Story

Aecon Group Inc. (TSE:ARE) shares have continued their recent momentum with a 30% gain in the last month alone. The last month tops off a massive increase of 161% in the last year.

Even after such a large jump in price, given about half the companies operating in Canada's Construction industry have price-to-sales ratios (or "P/S") above 1.5x, you may still consider Aecon Group as an attractive investment with its 0.4x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Aecon Group

What Does Aecon Group's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Aecon Group's revenue has gone into reverse gear, which is not great. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Keen to find out how analysts think Aecon Group's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Aecon Group would need to produce sluggish growth that's trailing the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 14%. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Looking ahead now, revenue is anticipated to remain buoyant, climbing by 9.1% during the coming year according to the eleven analysts following the company. Meanwhile, the broader industry is forecast to contract by 1.8%, which would indicate the company is doing very well.

In light of this, it's quite peculiar that Aecon Group's P/S sits below the majority of other companies. It looks like most investors aren't convinced at all that the company can achieve positive future growth in the face of a shrinking broader industry.

The Bottom Line On Aecon Group's P/S

Despite Aecon Group's share price climbing recently, its P/S still lags most other companies. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Aecon Group currently trades on a much lower than expected P/S since its growth forecasts are potentially beating a struggling industry. There could be some major unobserved threats to revenue preventing the P/S ratio from matching the positive outlook. One major risk is whether its revenue trajectory can keep outperforming under these tough industry conditions. So, the risk of a price drop looks to be subdued, but investors seem to think future revenue could see a lot of volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Aecon Group, and understanding should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.