Investors Still Aren't Entirely Convinced By Bri-Chem Corp.'s (TSE:BRY) Revenues Despite 59% Price Jump

Bri-Chem Corp. (TSE:BRY) shares have had a really impressive month, gaining 59% after a shaky period beforehand. Looking further back, the 12% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

In spite of the firm bounce in price, there still wouldn't be many who think Bri-Chem's price-to-sales (or "P/S") ratio of 0.1x is worth a mention when the median P/S in Canada's Trade Distributors industry is similar at about 0.5x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Bri-Chem

How Has Bri-Chem Performed Recently?

As an illustration, revenue has deteriorated at Bri-Chem over the last year, which is not ideal at all. 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 you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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 Bri-Chem's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The P/S?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Bri-Chem's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 16% decrease to the company's top line. Even so, admirably revenue has lifted 74% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

When compared to the industry's one-year growth forecast of 3.7%, the most recent medium-term revenue trajectory is noticeably more alluring

In light of this, it's curious that Bri-Chem's P/S sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Bri-Chem's P/S

Bri-Chem's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Bri-Chem currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. There could be some unobserved threats to revenue preventing the P/S ratio from matching this positive performance. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to see the likelihood of revenue fluctuations in the future.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Bri-Chem, and understanding these should be part of your investment process.

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

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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.