Why Investors Shouldn't Be Surprised By Catalyst Metals Limited's (ASX:CYL) 26% Share Price Plunge

Catalyst Metals Limited (ASX:CYL) shares have had a horrible month, losing 26% after a relatively good period beforehand. Nonetheless, the last 30 days have barely left a scratch on the stock's annual performance, which is up a whopping 358%.

Although its price has dipped substantially, Catalyst Metals' price-to-sales (or "P/S") ratio of 3.3x might still make it look like a strong buy right now compared to the wider Metals and Mining industry in Australia, where around half of the companies have P/S ratios above 63x and even P/S above 415x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Catalyst Metals

How Catalyst Metals Has Been Performing

With revenue growth that's inferior to most other companies of late, Catalyst Metals has been relatively sluggish. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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How Is Catalyst Metals' Revenue Growth Trending?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Catalyst Metals' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 148% last year. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 23% per year as estimated by the three analysts watching the company. With the industry predicted to deliver 113% growth per annum, the company is positioned for a weaker revenue result.

With this information, we can see why Catalyst Metals is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What Does Catalyst Metals' P/S Mean For Investors?

Shares in Catalyst Metals have plummeted and its P/S has followed suit. 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 Catalyst Metals maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Catalyst Metals with six simple checks on some of these key factors.

If you're unsure about the strength of Catalyst Metals' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.