Copa Corporation Inc.'s (TSE:7689) 35% Price Boost Is Out Of Tune With Revenues

Copa Corporation Inc. (TSE:7689) shares have continued their recent momentum with a 35% gain in the last month alone. Looking further back, the 21% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, when almost half of the companies in Japan's Consumer Retailing industry have price-to-sales ratios (or "P/S") below 0.2x, you may consider Copa as a stock probably not worth researching with its 1.1x 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.

Check out our latest analysis for Copa

What Does Copa's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Copa over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Retrospectively, the last year delivered a frustrating 23% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 66% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 3.6% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Copa's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

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

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

We've established that Copa currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Plus, you should also learn about these 3 warning signs we've spotted with Copa (including 2 which don't sit too well with us).

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.