PyroGenesis Canada Inc.'s (TSE:PYR) Popularity With Investors Under Threat As Stock Sinks 28%

PyroGenesis Canada Inc. (TSE:PYR) shares have retraced a considerable 28% in the last month, reversing a fair amount of their solid recent performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 15% share price drop.

In spite of the heavy fall in price, you could still be forgiven for thinking PyroGenesis Canada is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 10.2x, considering almost half the companies in Canada's Commercial Services industry have P/S ratios below 0.8x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for PyroGenesis Canada

What Does PyroGenesis Canada's Recent Performance Look Like?

As an illustration, revenue has deteriorated at PyroGenesis Canada over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on PyroGenesis Canada will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For PyroGenesis Canada?

PyroGenesis Canada's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 3.1%. As a result, revenue from three years ago have also fallen 52% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to shrink 1.9% in the next 12 months, the company's downward momentum is still inferior based on recent medium-term annualised revenue results.

With this in mind, we find it intriguing that PyroGenesis Canada's P/S exceeds that of its industry peers. In general, when revenue shrink rapidly the P/S premium often shrinks too, which could set up shareholders for future disappointment. There's potential for the P/S to fall to lower levels if the company doesn't improve its top-line growth, which would be difficult to do with the current industry outlook.

The Key Takeaway

PyroGenesis Canada's shares may have suffered, but its P/S remains high. 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.

Our examination of PyroGenesis Canada revealed its sharp three-year contraction in revenue isn't impacting its high P/S anywhere near as much as we would have predicted, given the industry is set to shrink less severely. When we see below average revenue, we suspect the share price is at risk of declining, sending the high P/S lower. In addition, we would be concerned whether the company can even maintain its medium-term level of performance under these tough industry conditions. Unless the company's relative performance improves markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 4 warning signs for PyroGenesis Canada (of which 2 don't sit too well with us!) you should know about.

If you're unsure about the strength of PyroGenesis Canada's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.