NFI Group Inc. (TSE:NFI) Screens Well But There Might Be A Catch

NFI Group Inc.'s (TSE:NFI) price-to-sales (or "P/S") ratio of 0.5x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Machinery industry in Canada have P/S ratios greater than 1.4x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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Check out our latest analysis for NFI Group

What Does NFI Group's P/S Mean For Shareholders?

Recent times have been pleasing for NFI Group as its revenue has risen in spite of the industry's average revenue going into reverse. One possibility is that the P/S ratio is low because investors think the company's revenue is going to fall away like everyone else's soon. Those who are bullish on NFI Group will be hoping that this isn't the case and the company continues to beat out the industry.

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Do Revenue Forecasts Match The Low P/S Ratio?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 5.8% last year. This was backed up an excellent period prior to see revenue up by 59% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 26% over the next year. That's shaping up to be materially higher than the 16% growth forecast for the broader industry.

With this information, we find it odd that NFI Group is trading at a P/S lower than the industry. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What Does NFI Group's P/S Mean For Investors?

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

A look at NFI Group'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.

Before you settle on your opinion, we've discovered 1 warning sign for NFI Group that you should be aware of.

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.