Investor Optimism Abounds Enerflex Ltd. (TSE:EFX) But Growth Is Lacking

With a median price-to-sales (or "P/S") ratio of close to 0.5x in the Energy Services industry in Canada, you could be forgiven for feeling indifferent about Enerflex Ltd.'s (TSE:EFX) P/S ratio of 0.4x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Enerflex

How Has Enerflex Performed Recently?

Recent revenue growth for Enerflex has been in line with the industry. Perhaps the market is expecting future revenue performance to show no drastic signs of changing, justifying the P/S being at current levels. Those who are bullish on Enerflex will be hoping that revenue performance can pick up, so that they can pick up the stock at a slightly lower valuation.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Enerflex.

Is There Some Revenue Growth Forecasted For Enerflex?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Enerflex's to be considered reasonable.

Retrospectively, the last year delivered a decent 6.4% gain to the company's revenues. The latest three year period has also seen an excellent 228% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 0.3% each year as estimated by the nine analysts watching the company. Meanwhile, the broader industry is forecast to expand by 3.6% each year, which paints a poor picture.

With this in consideration, we think it doesn't make sense that Enerflex's P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

What Does Enerflex's P/S Mean For Investors?

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.

While Enerflex's P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

Having said that, be aware Enerflex is showing 1 warning sign in our investment analysis, you should know about.

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).

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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.