There Is A Reason Sims Limited's (ASX:SGM) Price Is Undemanding

You may think that with a price-to-sales (or "P/S") ratio of 0.3x Sims Limited (ASX:SGM) 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 68.1x and even P/S above 414x 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.

See our latest analysis for Sims

What Does Sims' Recent Performance Look Like?

Recent times haven't been great for Sims as its revenue has been rising slower than most other companies. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sims.

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 Sims' is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered a decent 8.5% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 22% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 3.5% per year during the coming three years according to the twelve analysts following the company. That's shaping up to be materially lower than the 537% per annum growth forecast for the broader industry.

In light of this, it's understandable that Sims' 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 Sims' P/S

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 Sims 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. The company will need a change of fortune to justify the P/S rising higher in the future.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Sims, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Sims, 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.