Subdued Growth No Barrier To Covalon Technologies Ltd. (CVE:COV) With Shares Advancing 29%

Covalon Technologies Ltd. (CVE:COV) shares have continued their recent momentum with a 29% gain in the last month alone. This latest share price bounce rounds out a remarkable 305% gain over the last twelve months.

Following the firm bounce in price, when almost half of the companies in Canada's Biotechs industry have price-to-sales ratios (or "P/S") below 3.1x, you may consider Covalon Technologies as a stock probably not worth researching with its 3.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Covalon Technologies

What Does Covalon Technologies' P/S Mean For Shareholders?

The revenue growth achieved at Covalon Technologies over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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?

In order to justify its P/S ratio, Covalon Technologies would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 16% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 79% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Covalon Technologies' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Covalon Technologies' P/S

The large bounce in Covalon Technologies' shares has lifted the company's P/S handsomely. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

The fact that Covalon Technologies currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Covalon Technologies that you need to be mindful of.

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.