Ero Copper Corp.'s (TSE:ERO) Price Is Out Of Tune With Revenues

With a median price-to-sales (or "P/S") ratio of close to 3x in the Metals and Mining industry in Canada, you could be forgiven for feeling indifferent about Ero Copper Corp.'s (TSE:ERO) P/S ratio of 2.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Ero Copper

How Ero Copper Has Been Performing

Recent times haven't been great for Ero Copper as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

How Is Ero Copper's Revenue Growth Trending?

In order to justify its P/S ratio, Ero Copper would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a decent 8.5% gain to the company's revenues. However, due to its less than impressive performance prior to this period, revenue growth is practically non-existent over the last three years overall. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Shifting to the future, estimates from the eleven analysts covering the company suggest revenue should grow by 30% per year over the next three years. That's shaping up to be materially lower than the 38% per annum growth forecast for the broader industry.

With this in mind, we find it intriguing that Ero Copper's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What Does Ero Copper's P/S Mean For Investors?

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Given that Ero Copper's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

You need to take note of risks, for example - Ero Copper has 3 warning signs (and 1 which is significant) we think you should know about.

If you're unsure about the strength of Ero Copper's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.