Revenues Working Against João Fortes Engenharia S.A.'s (BVMF:JFEN3) Share Price Following 36% Dive

Simply Wall St · 10/16 09:05

The João Fortes Engenharia S.A. (BVMF:JFEN3) share price has softened a substantial 36% over the previous 30 days, handing back much of the gains the stock has made lately. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 89% loss during that time.

Since its price has dipped substantially, João Fortes Engenharia's price-to-sales (or "P/S") ratio of 0.5x might make it look like a buy right now compared to the Real Estate industry in Brazil, where around half of the companies have P/S ratios above 1.5x 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.

Check out our latest analysis for João Fortes Engenharia

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BOVESPA:JFEN3 Price to Sales Ratio vs Industry October 16th 2024

How João Fortes Engenharia Has Been Performing

João Fortes Engenharia certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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

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 João Fortes Engenharia's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 52% last year. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 7.1% shows it's noticeably less attractive.

In light of this, it's understandable that João Fortes Engenharia's P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

The southerly movements of João Fortes Engenharia's shares means its P/S is now sitting at a pretty low level. 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.

As we suspected, our examination of João Fortes Engenharia revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Before you take the next step, you should know about the 4 warning signs for João Fortes Engenharia (3 don't sit too well with us!) that we have uncovered.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.