Investors Aren't Entirely Convinced By Algonquin Power & Utilities Corp.'s (TSE:AQN) Revenues

It's not a stretch to say that Algonquin Power & Utilities Corp.'s (TSE:AQN) price-to-sales (or "P/S") ratio of 1.6x right now seems quite "middle-of-the-road" for companies in the Integrated Utilities industry in Canada, where the median P/S ratio is around 2x. 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.

Check out our latest analysis for Algonquin Power & Utilities

How Algonquin Power & Utilities Has Been Performing

Recent revenue growth for Algonquin Power & Utilities 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 Algonquin Power & Utilities will be hoping that revenue performance can pick up, so that they can pick up the stock at a slightly lower valuation.

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

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

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

Taking a look back first, we see that the company managed to grow revenues by a handy 6.9% last year. Pleasingly, revenue has also lifted 71% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the ten analysts covering the company suggest revenue should grow by 5.7% per annum over the next three years. That's shaping up to be materially higher than the 2.3% per year growth forecast for the broader industry.

With this information, we find it interesting that Algonquin Power & Utilities is trading at a fairly similar P/S compared to the industry. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Algonquin Power & Utilities currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. Perhaps uncertainty in the revenue forecasts are what's keeping the P/S ratio consistent with the rest of the industry. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Algonquin Power & Utilities (of which 2 are significant!) you should know about.

If these risks are making you reconsider your opinion on Algonquin Power & Utilities, 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.