Cascades Inc.'s (TSE:CAS) Shares Bounce 26% But Its Business Still Trails The Industry

The Cascades Inc. (TSE:CAS) share price has done very well over the last month, posting an excellent gain of 26%. Notwithstanding the latest gain, the annual share price return of 8.0% isn't as impressive.

In spite of the firm bounce in price, it would still be understandable if you think Cascades is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.3x, considering almost half the companies in Canada's Packaging industry have P/S ratios above 0.8x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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See our latest analysis for Cascades

What Does Cascades' Recent Performance Look Like?

Recent times haven't been great for Cascades as its revenue has been rising slower than most other companies. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

Keen to find out how analysts think Cascades' future stacks up against the industry? In that case, our free report is a great place to start.

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

Cascades' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.5% last year. The latest three year period has also seen a 9.9% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to slump, contracting by 1.0% during the coming year according to the five analysts following the company. With the industry predicted to deliver 3.3% growth, that's a disappointing outcome.

With this information, we are not surprised that Cascades is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Cascades' stock price has surged recently, but its but its P/S still remains modest. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Cascades' P/S is on the lower end of the spectrum. As other companies in the industry are forecasting revenue growth, Cascades' poor outlook justifies its low P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Cascades (2 are significant) you should be aware of.

If you're unsure about the strength of Cascades' 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.