Copa Corporation Inc.'s (TSE:7689) Shares Climb 32% But Its Business Is Yet to Catch Up

Copa Corporation Inc. (TSE:7689) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 39% in the last year.

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 1.2x 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.

Check out our latest analysis for Copa

How Has Copa Performed Recently?

As an illustration, revenue has deteriorated at Copa over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Copa, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Copa's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 16% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 66% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 3.8% shows it's an unpleasant look.

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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Copa shares have taken a big step in a northerly direction, but its P/S is elevated as a result. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Copa revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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 are concerning).

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.