Optimistic Investors Push Pan American Silver Corp. (TSE:PAAS) Shares Up 26% But Growth Is Lacking

Pan American Silver Corp. (TSE:PAAS) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 83% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Pan American Silver's P/S ratio of 4x, since the median price-to-sales (or "P/S") ratio for the Metals and Mining industry in Canada is also close to 4.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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Check out our latest analysis for Pan American Silver

How Pan American Silver Has Been Performing

Pan American Silver could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Pan American Silver's future stacks up against the industry? In that case, our free report is a great place to start.

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

There's an inherent assumption that a company should be matching the industry for P/S ratios like Pan American Silver's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 21% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 87% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the six analysts covering the company suggest revenue growth is heading into negative territory, declining 1.2% each year over the next three years. With the industry predicted to deliver 50% growth per annum, that's a disappointing outcome.

In light of this, it's somewhat alarming that Pan American Silver's P/S sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

The Key Takeaway

Pan American Silver's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

While Pan American Silver's P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Pan American Silver with six simple checks.

If these risks are making you reconsider your opinion on Pan American Silver, 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.