Further Upside For Bahema Educação S.A. (BVMF:BIED3) Shares Could Introduce Price Risks After 28% Bounce

Bahema Educação S.A. (BVMF:BIED3) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 57% share price drop in the last twelve months.

In spite of the firm bounce in price, Bahema Educação's price-to-sales (or "P/S") ratio of 0.3x might still make it look like a strong buy right now compared to the wider Capital Markets industry in Brazil, where around half of the companies have P/S ratios above 2.7x and even P/S above 6x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

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View our latest analysis for Bahema Educação

How Bahema Educação Has Been Performing

For instance, Bahema Educação's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. Those who are bullish on Bahema Educação will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Bahema Educação's earnings, revenue and cash flow.

How Is Bahema Educação's Revenue Growth Trending?

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

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 5.1%. Still, the latest three year period has seen an excellent 45% overall rise in revenue, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

In contrast to the company, the rest of the industry is expected to decline by 7.9% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

With this information, we find it very odd that Bahema Educação is trading at a P/S lower than the industry. It looks like most investors are not convinced at all that the company can maintain its recent positive growth rate in the face of a shrinking broader industry.

The Key Takeaway

Even after such a strong price move, Bahema Educação's P/S still trails the rest of the industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Bahema Educação revealed that despite growing revenue over the medium-term in a shrinking industry, the P/S doesn't reflect this as it's lower than the industry average. There could be some major unobserved threats to revenue preventing the P/S ratio from matching this positive performance. The most obvious risk is that its revenue trajectory may not keep outperforming under these tough industry conditions. While the chance of the share price dropping sharply is fairly remote, investors do seem to be anticipating future revenue instability.

It is also worth noting that we have found 4 warning signs for Bahema Educação (2 shouldn't be ignored!) that you need to take into consideration.

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.