Why We're Not Concerned About CECO Environmental Corp.'s (NASDAQ:CECO) Share Price

When you see that almost half of the companies in the Commercial Services industry in the United States have price-to-sales ratios (or "P/S") below 1.5x, CECO Environmental Corp. (NASDAQ:CECO) looks to be giving off some sell signals with its 2.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for CECO Environmental

What Does CECO Environmental's Recent Performance Look Like?

CECO Environmental's revenue growth of late has been pretty similar to most other companies. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For CECO Environmental?

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

Retrospectively, the last year delivered a decent 9.0% gain to the company's revenues. The latest three year period has also seen an excellent 76% 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 generate growth of 14% each year as estimated by the six analysts watching the company. With the industry only predicted to deliver 8.4% each year, the company is positioned for a stronger revenue result.

With this information, we can see why CECO Environmental is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our look into CECO Environmental shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

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

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.