Benign Growth For South32 Limited (ASX:S32) Underpins Its Share Price

You may think that with a price-to-sales (or "P/S") ratio of 1.3x South32 Limited (ASX:S32) is definitely a stock worth checking out, seeing as almost half of all the Metals and Mining companies in Australia have P/S ratios greater than 86.1x and even P/S above 458x 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 South32

What Does South32's Recent Performance Look Like?

While the industry has experienced revenue growth lately, South32's revenue has gone into reverse gear, which is not great. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

Keen to find out how analysts think South32's future stacks up against the industry? In that case, our free report is a great place to start.

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

In order to justify its P/S ratio, South32 would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered a frustrating 23% decrease to the company's top line. Still, the latest three year period has seen an excellent 61% overall rise in revenue, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 6.9% per year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 529% per annum, which is noticeably more attractive.

With this information, we can see why South32 is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From South32's P/S?

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that South32 maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for South32 with six simple checks on some of these key factors.

If you're unsure about the strength of South32's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.