What Verde AgriTech Limited's (TSE:NPK) 132% Share Price Gain Is Not Telling You

Verde AgriTech Limited (TSE:NPK) shareholders would be excited to see that the share price has had a great month, posting a 132% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 54%.

Even after such a large jump in price, it's still not a stretch to say that Verde AgriTech's price-to-sales (or "P/S") ratio of 3.2x 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 Recent Performance Look Like?

For example, consider that Verde AgriTech's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Verde AgriTech's earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Verde AgriTech's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 37% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 69% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 7.4% shows it's an unpleasant look.

With this information, we find it concerning that Verde AgriTech is trading at a fairly similar P/S compared to the industry. 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.

The Bottom Line On Verde AgriTech's P/S

Its shares have lifted substantially and now Verde AgriTech's P/S is back within range of the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look at Verde AgriTech revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It is also worth noting that we have found 4 warning signs for Verde AgriTech (3 are a bit concerning!) that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.