It's A Story Of Risk Vs Reward With Conifex Timber Inc. (TSE:CFF)
There wouldn't be many who think Conifex Timber Inc.'s (TSE:CFF) price-to-sales (or "P/S") ratio of 0.2x is worth a mention when the median P/S for the Forestry industry in Canada is similar at about 0.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
See our latest analysis for Conifex Timber
What Does Conifex Timber's P/S Mean For Shareholders?
Recent times haven't been great for Conifex Timber as its revenue has been falling quicker than most other companies. Perhaps the market is expecting future revenue performance to begin matching the rest of the industry, which has kept the P/S from declining. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.
Keen to find out how analysts think Conifex Timber's future stacks up against the industry? In that case, our free report is a great place to start.
Is There Some Revenue Growth Forecasted For Conifex Timber?
The only time you'd be comfortable seeing a P/S like Conifex Timber's is when the company's growth is tracking the industry closely.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 50%. Regardless, revenue has managed to lift by a handy 24% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.
Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 23% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 3.2%, which is noticeably less attractive.
In light of this, it's curious that Conifex Timber's P/S sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.
The Final Word
We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Conifex Timber currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. When we see a strong revenue outlook, with growth outpacing the industry, we can only assume potential uncertainty around these figures are what might be placing slight pressure on the P/S ratio. It appears some are indeed anticipating revenue instability, because these conditions should normally provide a boost to the share price.
Having said that, be aware Conifex Timber is showing 2 warning signs in our investment analysis, and 1 of those is significant.
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.
