There Is A Reason Lucapa Diamond Company Limited's (ASX:LOM) Price Is Undemanding

Lucapa Diamond Company Limited's (ASX:LOM) price-to-sales (or "P/S") ratio of 0.3x might make it look like a strong buy right now compared to the Metals and Mining industry in Australia, where around half of the companies have P/S ratios above 62.5x and even P/S above 335x 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 so limited.

Check out our latest analysis for Lucapa Diamond

What Does Lucapa Diamond's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Lucapa Diamond has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Lucapa Diamond will help you shine a light on its historical performance.

Is There Any Revenue Growth Forecasted For Lucapa Diamond?

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

Retrospectively, the last year delivered an exceptional 168% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 62% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 275% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's understandable that Lucapa Diamond's P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What Does Lucapa Diamond's P/S Mean For Investors?

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.

As we suspected, our examination of Lucapa Diamond revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

You always need to take note of risks, for example - Lucapa Diamond has 2 warning signs we think 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.