Stock Analysis

What Copa Corporation Inc.'s (TSE:7689) 26% Share Price Gain Is Not Telling You

TSE:7689
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Copa Corporation Inc. (TSE:7689) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 20% is also fairly reasonable.

Since its price has surged higher, you could be forgiven for thinking Copa is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1x, considering almost half the companies in Japan's Consumer Retailing industry have P/S ratios below 0.2x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Copa

ps-multiple-vs-industry
TSE:7689 Price to Sales Ratio vs Industry January 31st 2025

What Does Copa's P/S Mean For Shareholders?

For example, consider that Copa's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

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 Copa's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

Copa's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 13%. The last three years don't look nice either as the company has shrunk revenue by 56% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 8.9% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

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. 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.

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. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

You should always think about risks. Case in point, we've spotted 3 warning signs for Copa you should be aware of, and 2 of them are potentially serious.

If these risks are making you reconsider your opinion on Copa, explore our interactive list of high quality stocks to get an idea of what else is out there.

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

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.

About TSE:7689

Copa

Engages in the product demonstration sale and wholesale business in Japan.

Flawless balance sheet low.

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