The Western Investment Company of Canada Limited's (CVE:WI) P/S Still Appears To Be Reasonable

The Western Investment Company of Canada Limited's (CVE:WI) price-to-sales (or "P/S") ratio of 5.3x might make it look like a sell right now compared to the Capital Markets industry in Canada, where around half of the companies have P/S ratios below 4.2x and even P/S below 2x are quite common. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Western Investment Company of Canada

What Does Western Investment Company of Canada's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Western Investment Company of Canada has been doing very well. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Western Investment Company of Canada, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

There's an inherent assumption that a company should outperform the industry for P/S ratios like Western Investment Company of Canada's to be considered reasonable.

If we review the last year of revenue growth, we see the company's revenues grew exponentially. Although, its longer-term performance hasn't been anywhere near as strong with three-year revenue growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Weighing the recent medium-term upward revenue trajectory against the broader industry's one-year forecast for contraction of 27% shows it's a great look while it lasts.

With this information, we can see why Western Investment Company of Canada is trading at a high P/S compared to the industry. Investors are willing to pay more for a stock they hope will buck the trend of the broader industry going backwards. However, its current revenue trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.

The Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We see that Western Investment Company of Canada justifiably maintains its high P/S on the merits of its recentthree-year revenue growth beating forecasts amidst struggling industry. Right now shareholders are comfortable with the P/S as they are quite confident revenues aren't under threat. We still remain cautious about the company's ability to stay its recent course and swim against the current of the broader industry turmoil. Although, if the company's relative performance doesn't change it will continue to provide strong support to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with Western Investment Company of Canada (including 1 which shouldn't be ignored).

If you're unsure about the strength of Western Investment Company of 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.