Embraer S.A. (BVMF:EMBR3) Stock Rockets 28% But Many Are Still Ignoring The Company

The Embraer S.A. (BVMF:EMBR3) share price has done very well over the last month, posting an excellent gain of 28%. The annual gain comes to 153% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, Embraer may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 1.3x, considering almost half of all companies in the Aerospace & Defense industry in Brazil have P/S ratios greater than 2.7x and even P/S higher than 8x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Embraer

What Does Embraer's Recent Performance Look Like?

Embraer could be doing better as it's been growing revenue less than most other companies lately. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

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

How Is Embraer's Revenue Growth Trending?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 11% last year. The solid recent performance means it was also able to grow revenue by 17% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 17% per year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 7.9% per annum, which is noticeably less attractive.

With this information, we find it odd that Embraer is trading at a P/S lower than the industry. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What We Can Learn From Embraer's P/S?

The latest share price surge wasn't enough to lift Embraer's P/S close to the industry median. 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.

A look at Embraer's revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. There could be some major risk factors that are placing downward pressure on the P/S ratio. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Embraer that 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).

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.