Manuka Resources Limited's (ASX:MKR) Shares Bounce 30% But Its Business Still Trails The Industry

Manuka Resources Limited (ASX:MKR) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 4.4% in the last twelve months.

In spite of the firm bounce in price, Manuka Resources may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 2.2x, considering almost half of all companies in the Metals and Mining industry in Australia have P/S ratios greater than 60.6x and even P/S higher than 305x 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.

Check out our latest analysis for Manuka Resources

How Has Manuka Resources Performed Recently?

Recent times have been quite advantageous for Manuka Resources as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Manuka Resources' earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Manuka Resources?

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

Retrospectively, the last year delivered an exceptional 53% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 65% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 349% shows it's an unpleasant look.

With this in mind, we understand why Manuka Resources' P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What We Can Learn From Manuka Resources' P/S?

Shares in Manuka Resources have risen appreciably however, its P/S is still subdued. 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.

It's no surprise that Manuka Resources maintains its low P/S off the back of its sliding revenue over the medium-term. 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 moving strongly in either direction in the near future under these circumstances.

Before you take the next step, you should know about the 5 warning signs for Manuka Resources (2 are a bit unpleasant!) that we have uncovered.

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.