Further Upside For 5N Plus Inc. (TSE:VNP) Shares Could Introduce Price Risks After 28% Bounce

5N Plus Inc. (TSE:VNP) shares have continued their recent momentum with a 28% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 95% in the last year.

Even after such a large jump in price, there still wouldn't be many who think 5N Plus' price-to-sales (or "P/S") ratio of 1.5x is worth a mention when the median P/S in Canada's Chemicals industry is similar at about 1.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for 5N Plus

How Has 5N Plus Performed Recently?

5N Plus could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on 5N Plus will help you uncover what's on the horizon.

Is There Some Revenue Growth Forecasted For 5N Plus?

In order to justify its P/S ratio, 5N Plus would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.2%. Even so, admirably revenue has lifted 45% 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.

Turning to the outlook, the next year should demonstrate the company's robustness, generating growth of 13% as estimated by the four analysts watching the company. With the rest of the industry predicted to shrink by 0.1%, that would be a fantastic result.

With this in mind, we find it intriguing that 5N Plus' P/S trades in-line with its industry peers. Apparently some shareholders are skeptical of the contrarian forecasts and have been accepting lower selling prices.

What We Can Learn From 5N Plus' P/S?

Its shares have lifted substantially and now 5N Plus' P/S is back within range of 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.

We've established that 5N Plus currently trades on a lower than expected P/S since its growth forecasts are potentially beating a struggling industry. Given the glowing revenue forecasts, we can only assume potential risks are what might be capping the P/S ratio at its current levels. Perhaps there is some hesitation about the company's ability to keep swimming against the current of the broader industry turmoil. It appears some are indeed anticipating revenue instability, because the company's current prospects should normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for 5N Plus (1 is potentially serious) you should be aware of.

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.