There's Reason For Concern Over Sequoia Logística e Transportes S.A.'s (BVMF:SEQL3) Massive 73% Price Jump

Sequoia Logística e Transportes S.A. (BVMF:SEQL3) shareholders would be excited to see that the share price has had a great month, posting a 73% gain and recovering from prior weakness. But the last month did very little to improve the 62% share price decline over the last year.

Even after such a large jump in price, it's still not a stretch to say that Sequoia Logística e Transportes' price-to-sales (or "P/S") ratio of 0.3x right now seems quite "middle-of-the-road" compared to the Logistics industry in Brazil, where the median P/S ratio is around 0.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Sequoia Logística e Transportes

How Sequoia Logística e Transportes Has Been Performing

For example, consider that Sequoia Logística e Transportes' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

Is There Some Revenue Growth Forecasted For Sequoia Logística e Transportes?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Sequoia Logística e Transportes' to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 66%. As a result, revenue from three years ago have also fallen 52% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 7.0% shows it's an unpleasant look.

With this information, we find it concerning that Sequoia Logística e Transportes is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Bottom Line On Sequoia Logística e Transportes' P/S

Sequoia Logística e Transportes appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

We find it unexpected that Sequoia Logística e Transportes trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

You should always think about risks. Case in point, we've spotted 5 warning signs for Sequoia Logística e Transportes you should be aware of, and 4 of them are significant.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.