The Market Doesn't Like What It Sees From Composite Alliance Group Inc.'s (CVE:CAG) Revenues Yet As Shares Tumble 29%

The Composite Alliance Group Inc. (CVE:CAG) share price has softened a substantial 29% over the previous 30 days, handing back much of the gains the stock has made lately. Still, a bad month hasn't completely ruined the past year with the stock gaining 67%, which is great even in a bull market.

Following the heavy fall in price, given about half the companies operating in Canada's Machinery industry have price-to-sales ratios (or "P/S") above 1.3x, you may consider Composite Alliance Group as an attractive investment with its 0.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Composite Alliance Group

How Composite Alliance Group Has Been Performing

Recent times have been quite advantageous for Composite Alliance Group as its revenue has been rising very briskly. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. Those who are bullish on Composite Alliance Group 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 Composite Alliance Group's earnings, revenue and cash flow.

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 Composite Alliance Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 202% gain to the company's top line. The latest three year period has also seen an excellent 36% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 19% shows it's noticeably less attractive.

With this in consideration, it's easy to understand why Composite Alliance Group's P/S falls short of the mark set by its industry peers. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

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

The southerly movements of Composite Alliance Group's shares means its P/S is now sitting at a pretty low level. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

In line with expectations, Composite Alliance Group maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Before you take the next step, you should know about the 5 warning signs for Composite Alliance Group (4 don't sit too well with us!) that we have uncovered.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.