There's No Escaping Itafos Inc.'s (CVE:IFOS) Muted Revenues Despite A 25% Share Price Rise

Itafos Inc. (CVE:IFOS) shareholders have had their patience rewarded with a 25% share price jump in the last month. The annual gain comes to 108% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, when close to half the companies operating in Canada's Chemicals industry have price-to-sales ratios (or "P/S") above 1.4x, you may still consider Itafos as an enticing stock to check out with its 0.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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Check out our latest analysis for Itafos

What Does Itafos' P/S Mean For Shareholders?

The recent revenue growth at Itafos would have to be considered satisfactory if not spectacular. Perhaps the market believes the recent revenue performance might fall short of industry figures in the near future, leading to a reduced 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.

How Is Itafos' Revenue Growth Trending?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 5.3% last year. The latest three year period has also seen a 5.5% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 7.1% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in consideration, it's easy to understand why Itafos' P/S falls short of the mark set by its industry peers. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What We Can Learn From Itafos' P/S?

The latest share price surge wasn't enough to lift Itafos' P/S close to 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.

Our examination of Itafos confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Itafos that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.