Why Investors Shouldn't Be Surprised By IBC Advanced Alloys Corp.'s (CVE:IB) Low P/S

IBC Advanced Alloys Corp.'s (CVE:IB) price-to-sales (or "P/S") ratio of 0.2x might make it look like a strong buy right now compared to the Metals and Mining industry in Canada, where around half of the companies have P/S ratios above 3.9x and even P/S above 27x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for IBC Advanced Alloys

What Does IBC Advanced Alloys' P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for IBC Advanced Alloys, which is generally not a bad outcome. Perhaps the market believes the recent revenue performance might fall short of industry figures in the near future, leading to a reduced P/S. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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 IBC Advanced Alloys' earnings, revenue and cash flow.

How Is IBC Advanced Alloys' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as depressed as IBC Advanced Alloys' is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered a decent 5.7% gain to the company's revenues. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 27% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 43% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we understand why IBC Advanced Alloys' P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. 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 IBC Advanced Alloys' P/S

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 IBC Advanced Alloys revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - IBC Advanced Alloys has 2 warning signs (and 1 which can't be ignored) we think you should know about.

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.