Petra Diamonds Limited (LON:PDL) Doing What It Can To Lift Shares
Petra Diamonds Limited's (LON:PDL) price-to-sales (or "P/S") ratio of 0.3x might make it look like a buy right now compared to the Metals and Mining industry in the United Kingdom, where around half of the companies have P/S ratios above 1.2x and even P/S above 4x 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 Petra Diamonds
How Petra Diamonds Has Been Performing
With revenue growth that's superior to most other companies of late, Petra Diamonds has been doing relatively well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If you 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 Petra Diamonds' 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?
In order to justify its P/S ratio, Petra Diamonds would need to produce sluggish growth that's trailing the industry.
Taking a look back first, we see that the company managed to grow revenues by a handy 8.9% last year. The solid recent performance means it was also able to grow revenue by 18% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.
Shifting to the future, estimates from the five analysts covering the company are not great, suggesting revenue should decline by 1.0% each year over the next three years. Meanwhile, the industry is forecast to moderate by 2.3% per annum, which suggests the company won't escape the wider industry forces.
With this information, it's perhaps strange but not a major surprise that Petra Diamonds is trading at a lower P/S in comparison. With revenue going in reverse, it's not guaranteed that the P/S has found a floor yet. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.
The Final Word
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.
Our examination of Petra Diamonds' analyst forecasts revealed despite having an equally shaky outlook against the industry, its P/S much lower than we would have predicted. Even though the company's revenue outlook is on par, we assume potential risks are what might be placing downward pressure on the P/S ratio. The market could be pricing in revenue growth falling below that of the industry, a possibility given tough industry conditions. It appears some are indeed anticipating revenue instability, because the company's current prospects should typically see a P/S closer to the industry average.
You always need to take note of risks, for example - Petra Diamonds has 1 warning sign we think you should be aware of.
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.
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.
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