Why Investors Shouldn't Be Surprised By Algonquin Power & Utilities Corp.'s (TSE:AQN) Low P/S

Algonquin Power & Utilities Corp.'s (TSE:AQN) price-to-sales (or "P/S") ratio of 1.5x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Integrated Utilities industry in Canada have P/S ratios greater than 2.4x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Algonquin Power & Utilities

What Does Algonquin Power & Utilities' P/S Mean For Shareholders?

With only a limited decrease in revenue compared to most other companies of late, Algonquin Power & Utilities has been doing relatively well. It might be that many expect the comparatively superior revenue performance to degrade substantially, which has repressed the P/S. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. In saying that, existing shareholders probably aren't pessimistic about the share price if the company's revenue continues outplaying the industry.

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

How Is Algonquin Power & Utilities' Revenue Growth Trending?

In order to justify its P/S ratio, Algonquin Power & Utilities would need to produce sluggish growth that's trailing the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 6.8%. Regardless, revenue has managed to lift by a handy 29% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue growth is heading into negative territory, declining 0.2% each year over the next three years. With the industry predicted to deliver 6.0% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Algonquin Power & Utilities' P/S would sit below the majority of other companies. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Algonquin Power & Utilities' P/S

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.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Algonquin Power & Utilities' P/S is on the lower end of the spectrum. As other companies in the industry are forecasting revenue growth, Algonquin Power & Utilities' poor outlook justifies its low P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

Before you take the next step, you should know about the 4 warning signs for Algonquin Power & Utilities (2 shouldn't be ignored!) that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.