The Market Doesn't Like What It Sees From Neo Performance Materials Inc.'s (TSE:NEO) Revenues Yet

Simply Wall St · 04/15 10:19

You may think that with a price-to-sales (or "P/S") ratio of 0.6x Neo Performance Materials Inc. (TSE:NEO) is a stock worth checking out, seeing as almost half of all the Chemicals companies in Canada have P/S ratios greater than 1.1x and even P/S higher than 4x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

View our latest analysis for Neo Performance Materials

ps-multiple-vs-industry
TSX:NEO Price to Sales Ratio vs Industry April 15th 2025

How Has Neo Performance Materials Performed Recently?

With revenue that's retreating more than the industry's average of late, Neo Performance Materials has been very sluggish. Perhaps the market isn't expecting future revenue performance to improve, which has kept the P/S suppressed. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Neo Performance Materials will help you uncover what's on the horizon.

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

The only time you'd be truly comfortable seeing a P/S as low as Neo Performance Materials' is when the company's growth is on track to lag the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 17%. The last three years don't look nice either as the company has shrunk revenue by 12% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to slump, contracting by 2.3% during the coming year according to the three analysts following the company. That's not great when the rest of the industry is expected to grow by 4.5%.

In light of this, it's understandable that Neo Performance Materials' P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Neo Performance Materials' P/S

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It's clear to see that Neo Performance Materials maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

Having said that, be aware Neo Performance Materials is showing 1 warning sign in our investment analysis, you should know about.

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.