Revenues Working Against Eastern Platinum Limited's (TSE:ELR) Share Price Following 29% Dive

Explore Eastern Platinum's Fair Values from the Community and select yours

Eastern Platinum Limited (TSE:ELR) shares have retraced a considerable 29% in the last month, reversing a fair amount of their solid recent performance. Longer-term, the stock has been solid despite a difficult 30 days, gaining 24% in the last year.

After such a large drop in price, Eastern Platinum may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 0.5x, considering almost half of all companies in the Metals and Mining industry in Canada have P/S ratios greater than 3.8x and even P/S higher than 27x 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.

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Check out our latest analysis for Eastern Platinum

What Does Eastern Platinum's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Eastern Platinum over the last year, which is not ideal at all. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. 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.

Although there are no analyst estimates available for Eastern Platinum, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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 Eastern Platinum'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 38%. The last three years don't look nice either as the company has shrunk revenue by 23% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 42% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why Eastern Platinum's P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Eastern Platinum's P/S

Having almost fallen off a cliff, Eastern Platinum's share price has pulled its P/S way down as well. 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.

Our examination of Eastern Platinum confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Eastern Platinum (at least 2 which are a bit unpleasant), and understanding these should be part of your investment process.

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.