Neo Performance Materials Inc. (TSE:NEO) Shares Fly 27% But Investors Aren't Buying For Growth

Despite an already strong run, Neo Performance Materials Inc. (TSE:NEO) shares have been powering on, with a gain of 27% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 3.2% isn't as impressive.

Although its price has surged higher, Neo Performance Materials' price-to-sales (or "P/S") ratio of 0.5x might still make it look like a buy right now compared to the Chemicals industry in Canada, where around half of the companies have P/S ratios above 1x and even P/S above 5x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Neo Performance Materials

How Has Neo Performance Materials Performed Recently?

Neo Performance Materials could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Neo Performance Materials.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Neo Performance Materials would need to produce sluggish growth that's trailing the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 8.4%. Even so, admirably revenue has lifted 44% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 5.6% as estimated by the five analysts watching the company. With the industry predicted to deliver 0.03% growth, that's a disappointing outcome.

With this in consideration, we find it intriguing that Neo Performance Materials' P/S is closely matching its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Neo Performance Materials' P/S

The latest share price surge wasn't enough to lift Neo Performance Materials' P/S close to the industry median. 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.

As we suspected, our examination of Neo Performance Materials' analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, Neo Performance Materials' poor outlook justifies its low P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Neo Performance Materials (of which 1 is significant!) you should know about.

If these risks are making you reconsider your opinion on Neo Performance Materials, 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