Cleantek Industries Inc. (CVE:CTEK) Might Not Be As Mispriced As It Looks After Plunging 32%

Cleantek Industries Inc. (CVE:CTEK) shareholders that were waiting for something to happen have been dealt a blow with a 32% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 43% share price drop.

Although its price has dipped substantially, it's still not a stretch to say that Cleantek Industries' price-to-sales (or "P/S") ratio of 0.2x right now seems quite "middle-of-the-road" compared to the Energy Services industry in Canada, where the median P/S ratio is around 0.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Cleantek Industries

What Does Cleantek Industries' P/S Mean For Shareholders?

For example, consider that Cleantek Industries' financial performance has been pretty ordinary lately as revenue growth is non-existent. Perhaps the market believes the recent run-of-the-mill revenue performance isn't enough to outperform the industry, which has kept the P/S muted. Those who are bullish on Cleantek Industries will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

How Is Cleantek Industries' Revenue Growth Trending?

Cleantek Industries' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Although pleasingly revenue has lifted 78% in aggregate from three years ago, notwithstanding the last 12 months. So while the company has done a solid job in the past, it's somewhat concerning to see revenue growth decline as much as it has.

In contrast to the company, the rest of the industry is expected to decline by 9.8% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

With this information, we find it odd that Cleantek Industries is trading at a fairly similar P/S to the industry. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Final Word

With its share price dropping off a cliff, the P/S for Cleantek Industries looks to be in line with the rest of the Energy Services industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Cleantek Industries revealed its growing revenue over the medium-term hasn't helped elevate its P/S above that of the industry, which is surprising given the industry is set to shrink. There could be some unobserved threats to revenue preventing the P/S ratio from outpacing the industry much like its revenue performance. One major risk is whether its revenue trajectory can keep outperforming under these tough industry conditions. It appears some are indeed anticipating revenue instability, because this relative performance should normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Cleantek Industries, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Cleantek Industries, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com