Market Participants Recognise Cargojet Inc.'s (TSE:CJT) Revenues Pushing Shares 28% Higher

Cargojet Inc. (TSE:CJT) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 45% in the last year.

Following the firm bounce in price, given close to half the companies operating in Canada's Logistics industry have price-to-sales ratios (or "P/S") below 0.6x, you may consider Cargojet as a stock to potentially avoid with its 2.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Cargojet

How Cargojet Has Been Performing

There hasn't been much to differentiate Cargojet's and the industry's retreating revenue lately. One possibility is that the P/S ratio is high because investors think the company can turn things around and break free from the broader downward trend in revenue. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Cargojet's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 10% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 24% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 8.2% per year as estimated by the eleven analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 5.3% each year, which is noticeably less attractive.

With this in mind, it's not hard to understand why Cargojet's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Cargojet's P/S is on the rise since its shares have risen strongly. 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.

We've established that Cargojet maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Logistics industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Cargojet (1 is a bit concerning!) that you need to be mindful of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com