The Market Doesn't Like What It Sees From Savannah Goldfields Limited's (ASX:SVG) Revenues Yet

With a price-to-sales (or "P/S") ratio of 0.5x Savannah Goldfields Limited (ASX:SVG) may be sending very bullish signals at the moment, given that almost half of all the Metals and Mining companies in Australia have P/S ratios greater than 86.6x and even P/S higher than 494x are not unusual. 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 Savannah Goldfields

What Does Savannah Goldfields' P/S Mean For Shareholders?

Savannah Goldfields certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Savannah Goldfields will help you shine a light on its historical performance.

How Is Savannah Goldfields' Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 68% gain to the company's top line. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

This is in contrast to the rest of the industry, which is expected to grow by 84% over the next year, materially higher than the company's recent medium-term annualised growth rates.

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

The Bottom Line On Savannah Goldfields' P/S

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Savannah Goldfields revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. 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 experience a reversal of fortunes anytime soon.

You need to take note of risks, for example - Savannah Goldfields has 4 warning signs (and 2 which are a bit concerning) we think you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.