Even With A 36% Surge, Cautious Investors Are Not Rewarding Focus Minerals Limited's (ASX:FML) Performance Completely

Despite an already strong run, Focus Minerals Limited (ASX:FML) shares have been powering on, with a gain of 36% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 27% in the last year.

In spite of the firm bounce in price, Focus Minerals may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.8x, since almost half of all companies in the Metals and Mining industry in Australia have P/S ratios greater than 62.7x and even P/S higher than 314x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

See our latest analysis for Focus Minerals

What Does Focus Minerals' P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Focus Minerals has been doing very well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. 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 Focus Minerals will help you shine a light on its historical performance.

How Is Focus Minerals' Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 231% gain to the company's top line. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Comparing that to the industry, which is only predicted to deliver 313% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

In light of this, it's peculiar that Focus Minerals' P/S sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Focus Minerals' P/S

Focus Minerals' recent share price jump still sees fails to bring its P/S alongside the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Focus Minerals revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Focus Minerals (2 are significant!) that you should be aware of before investing here.

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.