Unpleasant Surprises Could Be In Store For Franco-Nevada Corporation's (TSE:FNV) Shares

When close to half the companies in the Metals and Mining industry in Canada have price-to-sales ratios (or "P/S") below 2.9x, you may consider Franco-Nevada Corporation (TSE:FNV) as a stock to avoid entirely with its 18.4x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Franco-Nevada

What Does Franco-Nevada's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Franco-Nevada's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Franco-Nevada will help you uncover what's on the horizon.

How Is Franco-Nevada's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Franco-Nevada's is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 7.4%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 20% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the twelve analysts covering the company suggest revenue should grow by 2.4% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 16% each year, which is noticeably more attractive.

With this information, we find it concerning that Franco-Nevada is trading at a P/S higher than the industry. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

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.

We've concluded that Franco-Nevada currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Franco-Nevada with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Franco-Nevada's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.