Lucara Diamond Corp.'s (TSE:LUC) Share Price Boosted 47% But Its Business Prospects Need A Lift Too

Lucara Diamond Corp. (TSE:LUC) shares have had a really impressive month, gaining 47% after a shaky period beforehand. Notwithstanding the latest gain, the annual share price return of 9.9% isn't as impressive.

In spite of the firm bounce in price, Lucara Diamond may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.8x, since almost half of all companies in the Metals and Mining industry in Canada have P/S ratios greater than 3.1x and even P/S higher than 17x 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.

View our latest analysis for Lucara Diamond

How Has Lucara Diamond Performed Recently?

With revenue growth that's inferior to most other companies of late, Lucara Diamond has been relatively sluggish. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

How Is Lucara Diamond's Revenue Growth Trending?

In order to justify its P/S ratio, Lucara Diamond would need to produce anemic growth that's substantially trailing the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.5% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 2.6% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 27% during the coming year according to the one analyst following the company. That's shaping up to be materially lower than the 33% growth forecast for the broader industry.

With this information, we can see why Lucara Diamond is trading at a P/S lower than the industry. 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 Lucara Diamond's P/S

Shares in Lucara Diamond have risen appreciably however, its P/S is still subdued. 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.

As expected, our analysis of Lucara Diamond's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Lucara Diamond (1 is a bit concerning!) that you should be aware of.

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