Insufficient Growth At Covalon Technologies Ltd. (CVE:COV) Hampers Share Price

With a price-to-sales (or "P/S") ratio of 1.2x Covalon Technologies Ltd. (CVE:COV) may be sending bullish signals at the moment, given that almost half of all the Biotechs companies in Canada have P/S ratios greater than 2.9x and even P/S higher than 8x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Covalon Technologies

How Covalon Technologies Has Been Performing

Revenue has risen firmly for Covalon Technologies recently, which is pleasing to see. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. 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 Covalon Technologies' earnings, revenue and cash flow.

How Is Covalon Technologies' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Covalon Technologies' is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered an exceptional 30% gain to the company's top line. Still, revenue has fallen 5.2% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 1,147% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's understandable that Covalon Technologies' P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

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.

It's no surprise that Covalon Technologies 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.

It is also worth noting that we have found 3 warning signs for Covalon Technologies (2 are a bit unpleasant!) that you need to take into consideration.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.