Amerigo Resources Ltd.'s (TSE:ARG) Shares Bounce 26% But Its Business Still Trails The Industry

Despite an already strong run, Amerigo Resources Ltd. (TSE:ARG) shares have been powering on, with a gain of 26% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 46% in the last year.

In spite of the firm bounce in price, Amerigo Resources' price-to-sales (or "P/S") ratio of 1.4x might still make it look like a strong buy right now compared to the wider Metals and Mining industry in Canada, where around half of the companies have P/S ratios above 3.6x and even P/S above 26x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Amerigo Resources

What Does Amerigo Resources' P/S Mean For Shareholders?

Amerigo Resources could be doing better as it's been growing revenue less than most other companies lately. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

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

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

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

If we review the last year of revenue growth, the company posted a terrific increase of 28%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 6.1% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 6.1% during the coming year according to the one analyst following the company. That's shaping up to be materially lower than the 69% growth forecast for the broader industry.

With this information, we can see why Amerigo Resources 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.

The Key Takeaway

Even after such a strong price move, Amerigo Resources' P/S still trails the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Amerigo Resources' analyst forecasts revealed that its inferior revenue outlook is contributing 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.

You always need to take note of risks, for example - Amerigo Resources has 2 warning signs we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.