Improved Revenues Required Before Itafos Inc. (CVE:IFOS) Stock's 29% Jump Looks Justified

Itafos Inc. (CVE:IFOS) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. The annual gain comes to 102% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, Itafos' price-to-sales (or "P/S") ratio of 0.9x might still make it look like a strong buy right now compared to the wider Chemicals industry in Canada, where around half of the companies have P/S ratios above 3.1x and even P/S above 7x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

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View our latest analysis for Itafos

How Has Itafos Performed Recently?

The revenue growth achieved at Itafos over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. Those who are bullish on Itafos will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for Itafos, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Itafos' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 17% last year. Still, revenue has fallen 3.7% in total from three years ago, which is quite disappointing. 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 5.9% shows it's an unpleasant look.

With this information, we are not surprised that Itafos is trading at a P/S lower than the industry. 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.

What Does Itafos' P/S Mean For Investors?

Even after such a strong price move, Itafos' P/S still trails the rest of the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

It's no surprise that Itafos maintains its low P/S off the back of its sliding revenue over the medium-term. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Itafos.

If you're unsure about the strength of Itafos' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.