Revenues Not Telling The Story For GFL Environmental Inc. (TSE:GFL)

When close to half the companies in the Commercial Services industry in Canada have price-to-sales ratios (or "P/S") below 1.1x, you may consider GFL Environmental Inc. (TSE:GFL) as a stock to potentially avoid with its 2.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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What Does GFL Environmental's P/S Mean For Shareholders?

GFL Environmental certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, GFL Environmental would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 12% last year. Pleasingly, revenue has also lifted 47% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to slump, contracting by 0.4% per year during the coming three years according to the analysts following the company. With the industry predicted to deliver 7.3% growth per year, that's a disappointing outcome.

In light of this, it's alarming that GFL Environmental's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh heavily on the share price eventually.

The Final Word

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.

Our examination of GFL Environmental's analyst forecasts revealed that its shrinking revenue outlook isn't drawing down its high P/S anywhere near as much as we would have predicted. Right now we aren't comfortable with the high P/S as the predicted future revenue decline likely to impact the positive sentiment that's propping up the P/S. At these price levels, investors should remain cautious, particularly if things don't improve.

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

If these risks are making you reconsider your opinion on GFL Environmental, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.