St Barbara Limited (ASX:SBM) Surges 27% Yet Its Low P/S Is No Reason For Excitement

Explore St Barbara's Fair Values from the Community and select yours

The St Barbara Limited (ASX:SBM) share price has done very well over the last month, posting an excellent gain of 27%. Looking back a bit further, it's encouraging to see the stock is up 69% in the last year.

Although its price has surged higher, St Barbara's price-to-sales (or "P/S") ratio of 1.8x might still make it look like a strong buy right now compared to the wider Metals and Mining industry in Australia, where around half of the companies have P/S ratios above 66x and even P/S above 626x 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.

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See our latest analysis for St Barbara

What Does St Barbara's P/S Mean For Shareholders?

St Barbara hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. 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.

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Do Revenue Forecasts Match The Low P/S Ratio?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 26%. As a result, revenue from three years ago have also fallen 70% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 33% per annum as estimated by the three analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 123% per annum, which is noticeably more attractive.

With this information, we can see why St Barbara is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What Does St Barbara's P/S Mean For Investors?

Even after such a strong price move, St Barbara's P/S still trails the rest of the industry. 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.

We've established that St Barbara maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 2 warning signs we've spotted with St Barbara.

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.

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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.