João Fortes Engenharia S.A.'s (BVMF:JFEN3) Shares Leap 32% Yet They're Still Not Telling The Full Story

Those holding João Fortes Engenharia S.A. (BVMF:JFEN3) shares would be relieved that the share price has rebounded 32% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 26% over that time.

Even after such a large jump in price, João Fortes Engenharia's price-to-sales (or "P/S") ratio of 0.7x might still make it look like a buy right now compared to the Real Estate industry in Brazil, where around half of the companies have P/S ratios above 1.8x and even P/S above 5x 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 limited.

See our latest analysis for João Fortes Engenharia

What Does João Fortes Engenharia's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, João Fortes Engenharia has been doing very well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Although there are no analyst estimates available for João Fortes Engenharia, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is João Fortes Engenharia's Revenue Growth Trending?

João Fortes Engenharia's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

If we review the last year of revenue growth, we see the company's revenues grew exponentially. Still, revenue has fallen 34% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

It's interesting to note that the rest of the industry is similarly expected to decline by 13% over the next year, which is just as bad as the company's recent medium-term revenue decline.

In light of this, the fact João Fortes Engenharia's P/S sits below the majority of other companies is unanticipated but certainly not shocking. With revenue going in reverse, it's not guaranteed that the P/S has found a floor yet, despite the industry heading down in unison. There is still potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth, which would be difficult to do with the current industry outlook.

The Final Word

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

Upon examining João Fortes Engenharia, we found that its recent revenue decline over the past three-year is affecting its P/S ratio more than we initially expected, even though the wider industry is also expected to experience a decline in revenue. There could be some further unobserved threats to revenue preventing the P/S ratio from keeping up with the industry average. Perhaps there is some hesitation about the company's ability to stay its recent medium-term course and resist further pain to its business from the broader industry turmoil. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for João Fortes Engenharia that you should be aware of.

If these risks are making you reconsider your opinion on João Fortes Engenharia, explore our interactive list of high quality stocks to get an idea of what else is out there.

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.