Optimistic Investors Push Aegis Brands Inc. (TSE:AEG) Shares Up 28% But Growth Is Lacking

Aegis Brands Inc. (TSE:AEG) shares have continued their recent momentum with a 28% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 13% in the last twelve months.

Even after such a large jump in price, it's still not a stretch to say that Aegis Brands' price-to-sales (or "P/S") ratio of 2x right now seems quite "middle-of-the-road" compared to the Hospitality industry in Canada, seeing as it matches the P/S ratio of the wider industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Aegis Brands

What Does Aegis Brands' Recent Performance Look Like?

Recent times have been quite advantageous for Aegis Brands as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to taper off, which has kept the P/S from rising. Those who are bullish on Aegis Brands 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 Aegis Brands' earnings, revenue and cash flow.

How Is Aegis Brands' Revenue Growth Trending?

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

Retrospectively, the last year delivered an explosive gain to the company's top line. Pleasingly, revenue has also lifted 80% in aggregate from three years ago, thanks to the last 12 months of explosive growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 193% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Aegis Brands' P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

What Does Aegis Brands' P/S Mean For Investors?

Aegis Brands' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

We've established that Aegis Brands' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Aegis Brands (3 are potentially serious) you should be aware of.

If these risks are making you reconsider your opinion on Aegis Brands, 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.