Green Plains Inc. (NASDAQ:GPRE) Might Not Be As Mispriced As It Looks After Plunging 34%

To the annoyance of some shareholders, Green Plains Inc. (NASDAQ:GPRE) shares are down a considerable 34% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 73% share price decline.

After such a large drop in price, Green Plains' price-to-sales (or "P/S") ratio of 0.2x might make it look like a buy right now compared to the Oil and Gas industry in the United States, where around half of the companies have P/S ratios above 1.8x and even P/S above 5x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Green Plains

What Does Green Plains' P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Green Plains' revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Keen to find out how analysts think Green Plains' future stacks up against the industry? In that case, our free report is a great place to start.

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

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 25%. This means it has also seen a slide in revenue over the longer-term as revenue is down 13% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 11% each year as estimated by the five analysts watching the company. That's shaping up to be materially higher than the 3.3% each year growth forecast for the broader industry.

With this in consideration, we find it intriguing that Green Plains' P/S sits behind most of its industry peers. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From Green Plains' P/S?

The southerly movements of Green Plains' shares means its P/S is now sitting at a pretty low level. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

To us, it seems Green Plains currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Green Plains with six simple checks will allow you to discover any risks that could be an issue.

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