It's not a stretch to say that Air Canada's (TSE:AC) price-to-sales (or "P/S") ratio of 0.2x right now seems quite "middle-of-the-road" for companies in the Airlines industry in Canada, where the median P/S ratio is around 0.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
Check out our latest analysis for Air Canada
How Has Air Canada Performed Recently?
Recent times have been advantageous for Air Canada as its revenues have been rising faster than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Air Canada.How Is Air Canada's Revenue Growth Trending?
The only time you'd be comfortable seeing a P/S like Air Canada's is when the company's growth is tracking the industry closely.
Taking a look back first, we see that the company grew revenue by an impressive 17% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.
Turning to the outlook, the next three years should generate growth of 4.5% per annum as estimated by the analysts watching the company. That's shaping up to be materially lower than the 59% per year growth forecast for the broader industry.
With this information, we find it interesting that Air Canada is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. 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 Does Air Canada's P/S Mean For Investors?
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.
Our look at the analysts forecasts of Air Canada's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. 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. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Air Canada (1 makes us a bit uncomfortable) you should be aware of.
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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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
About TSX:AC
Air Canada
Provides domestic, U.S. transborder, and international airline services.
Undervalued with solid track record.
