Even With A 29% Surge, Cautious Investors Are Not Rewarding Kingsgate Consolidated Limited's (ASX:KCN) Performance Completely

Kingsgate Consolidated Limited (ASX:KCN) shares have continued their recent momentum with a 29% gain in the last month alone. The annual gain comes to 115% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, Kingsgate Consolidated may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 2.2x, since almost half of all companies in the Metals and Mining industry in Australia have P/S ratios greater than 71.9x and even P/S higher than 633x are not unusual. 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.

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See our latest analysis for Kingsgate Consolidated

How Has Kingsgate Consolidated Performed Recently?

With revenue growth that's inferior to most other companies of late, Kingsgate Consolidated 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 Kingsgate Consolidated's Revenue Growth Trending?

In order to justify its P/S ratio, Kingsgate Consolidated would need to produce anemic growth that's substantially trailing the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 153%. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 66% over the next year. That's shaping up to be materially higher than the 58% growth forecast for the broader industry.

With this information, we find it odd that Kingsgate Consolidated is trading at a P/S lower than the industry. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Final Word

Even after such a strong price move, Kingsgate Consolidated's P/S still trails the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Kingsgate Consolidated's analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Kingsgate Consolidated that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.