Risks Still Elevated At These Prices As Verde AgriTech Limited (TSE:NPK) Shares Dive 33%

The Verde AgriTech Limited (TSE:NPK) share price has softened a substantial 33% over the previous 30 days, handing back much of the gains the stock has made lately. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 33% share price drop.

In spite of the heavy fall in price, it's still not a stretch to say that Verde AgriTech's price-to-sales (or "P/S") ratio of 1.4x right now seems quite "middle-of-the-road" compared to the Chemicals industry in Canada, seeing as it matches the P/S ratio of the wider industry. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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View our latest analysis for Verde AgriTech

What Does Verde AgriTech's P/S Mean For Shareholders?

For instance, Verde AgriTech's receding revenue in recent times would have to be some food for thought. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Verde AgriTech will help you shine a light on its historical performance.

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

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

Retrospectively, the last year delivered a frustrating 39% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 49% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 8.0% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Verde AgriTech's P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What We Can Learn From Verde AgriTech's P/S?

Verde AgriTech's plummeting stock price has brought its P/S back to a similar region as the rest of the 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.

We find it unexpected that Verde AgriTech trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Verde AgriTech is showing 4 warning signs in our investment analysis, and 2 of those don't sit too well with us.

If these risks are making you reconsider your opinion on Verde AgriTech, 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.