Take Care Before Jumping Onto Verde AgriTech Limited (TSE:NPK) Even Though It's 26% Cheaper

Verde AgriTech Limited (TSE:NPK) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 44% share price drop.

Even after such a large drop in price, there still wouldn't be many who think Verde AgriTech's price-to-sales (or "P/S") ratio of 1.4x is worth a mention when the median P/S in Canada's Chemicals industry is similar at about 1.1x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Verde AgriTech

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

As an illustration, revenue has deteriorated at Verde AgriTech over the last year, which is not ideal at all. 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 you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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.

Do Revenue Forecasts Match The P/S Ratio?

Verde AgriTech's 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 a frustrating 46% decrease to the company's top line. Even so, admirably revenue has lifted 35% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

When compared to the industry's one-year growth forecast of 5.4%, the most recent medium-term revenue trajectory is noticeably more alluring

In light of this, it's curious that Verde AgriTech's P/S sits in line with the majority of other companies. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Key Takeaway

With its share price dropping off a cliff, the P/S for Verde AgriTech looks to be in line with the rest of the Chemicals industry. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We didn't quite envision Verde AgriTech's P/S sitting in line with the wider industry, considering the revenue growth over the last three-year is higher than the current industry outlook. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to see the likelihood of revenue fluctuations in the future.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Verde AgriTech (1 can't be ignored) you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.