Revenues Not Telling The Story For Imaflex Inc. (CVE:IFX) After Shares Rise 48%

The Imaflex Inc. (CVE:IFX) share price has done very well over the last month, posting an excellent gain of 48%. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.6% over the last year.

Even after such a large jump in price, there still wouldn't be many who think Imaflex's price-to-sales (or "P/S") ratio of 0.6x is worth a mention when the median P/S in Canada's Packaging industry is similar at about 0.8x. 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.

Check out our latest analysis for Imaflex

What Does Imaflex's P/S Mean For Shareholders?

Imaflex could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Imaflex.

Is There Some Revenue Growth Forecasted For Imaflex?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 5.7%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 7.9% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 1.4% over the next year. With the industry predicted to deliver 4.2% growth, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Imaflex's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Imaflex appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Given that Imaflex's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 3 warning signs for Imaflex (1 is a bit unpleasant!) that you need to take into consideration.

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.