Further Upside For PesoRama Inc. (CVE:PESO) Shares Could Introduce Price Risks After 45% Bounce

PesoRama Inc. (CVE:PESO) shares have had a really impressive month, gaining 45% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 25% is also fairly reasonable.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about PesoRama's P/S ratio of 1.1x, since the median price-to-sales (or "P/S") ratio for the Specialty Retail industry in Canada is also close to 0.7x. 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.

View our latest analysis for PesoRama

How Has PesoRama Performed Recently?

Recent times have been quite advantageous for PesoRama as its revenue has been rising very briskly. It might be that many expect the strong revenue performance to wane, which has kept the share price, and thus the P/S ratio, from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on PesoRama will help you shine a light on its historical performance.

Do Revenue Forecasts Match The P/S Ratio?

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

Taking a look back first, we see that the company grew revenue by an impressive 56% last year. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 8.2% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that PesoRama is trading at a fairly similar P/S compared to the industry. It may be that most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From PesoRama's P/S?

Its shares have lifted substantially and now PesoRama's P/S is back within range of the industry median. 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.

To our surprise, PesoRama revealed its three-year revenue trends aren't contributing to its P/S as much as we would have predicted, given they look better than current industry expectations. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It is also worth noting that we have found 5 warning signs for PesoRama (3 shouldn't be ignored!) that you need to take into consideration.

If these risks are making you reconsider your opinion on PesoRama, 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.