Core Lithium Ltd (ASX:CXO) Surges 38% Yet Its Low P/S Is No Reason For Excitement

Despite an already strong run, Core Lithium Ltd (ASX:CXO) shares have been powering on, with a gain of 38% in the last thirty days. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 70% share price drop in the last twelve months.

Even after such a large jump in price, Core Lithium may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 1.5x, considering almost half of all companies in the Metals and Mining industry in Australia have P/S ratios greater than 65.9x and even P/S higher than 289x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

View our latest analysis for Core Lithium

What Does Core Lithium's P/S Mean For Shareholders?

Recent times haven't been great for Core Lithium as its revenue has been rising slower than most other companies. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as depressed as Core Lithium's is when the company's growth is on track to lag the industry decidedly.

Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months. Still, revenue has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 4.5% per annum as estimated by the six analysts watching the company. Meanwhile, the broader industry is forecast to expand by 542% per annum, which paints a poor picture.

With this in consideration, we find it intriguing that Core Lithium's P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

Even after such a strong price move, Core Lithium's P/S still trails the rest of the industry. 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 Core Lithium's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Core Lithium that you need to be mindful of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.