Improved Revenues Required Before Metro Mining Limited (ASX:MMI) Stock's 26% Jump Looks Justified

Metro Mining Limited (ASX:MMI) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 139% in the last year.

In spite of the firm bounce in price, Metro Mining may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.5x, since almost half of all companies in the Metals and Mining industry in Australia have P/S ratios greater than 75.3x and even P/S higher than 615x 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.

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Check out our latest analysis for Metro Mining

How Has Metro Mining Performed Recently?

Metro Mining could be doing better as it's been growing revenue less than most other companies lately. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Metro Mining will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

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

Retrospectively, the last year delivered an exceptional 46% gain to the company's top line. The latest three year period has also seen an excellent 93% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 6.6% each year over the next three years. That's shaping up to be materially lower than the 18% per annum growth forecast for the broader industry.

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

The Bottom Line On Metro Mining's P/S

Shares in Metro Mining have risen appreciably however, its P/S is still subdued. 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.

As expected, our analysis of Metro Mining's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Metro Mining that you should be aware of.

If these risks are making you reconsider your opinion on Metro Mining, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.