Covalon Technologies Ltd.'s (CVE:COV) Popularity With Investors Is Under Threat From Overpricing

Explore Covalon Technologies's Fair Values from the Community and select yours

With a median price-to-sales (or "P/S") ratio of close to 1.9x in the Biotechs industry in Canada, you could be forgiven for feeling indifferent about Covalon Technologies Ltd.'s (CVE:COV) P/S ratio of 2.3x. 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.

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View our latest analysis for Covalon Technologies

How Covalon Technologies Has Been Performing

Covalon Technologies certainly has been doing a good job lately as it's been growing revenue more than most other companies. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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Is There Some Revenue Growth Forecasted For Covalon Technologies?

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

Retrospectively, the last year delivered an exceptional 29% gain to the company's top line. The latest three year period has also seen an excellent 62% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 10% each year during the coming three years according to the one analyst following the company. That's shaping up to be materially lower than the 113% per year growth forecast for the broader industry.

With this information, we find it interesting that Covalon Technologies is trading at a fairly similar P/S compared to the industry. 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 Bottom Line On Covalon Technologies' P/S

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Given that Covalon Technologies' 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. A positive change is needed in order to justify the current price-to-sales ratio.

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

If these risks are making you reconsider your opinion on Covalon Technologies, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.