Some Shareholders Feeling Restless Over Cerro de Pasco Resources Inc.'s (CVE:CDPR) P/S Ratio

When you see that almost half of the companies in the Metals and Mining industry in Canada have price-to-sales ratios (or "P/S") below 3.5x, Cerro de Pasco Resources Inc. (CVE:CDPR) looks to be giving off strong sell signals with its 6.7x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Cerro de Pasco Resources

What Does Cerro de Pasco Resources' Recent Performance Look Like?

As an illustration, revenue has deteriorated at Cerro de Pasco Resources over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Cerro de Pasco Resources' earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/S as steep as Cerro de Pasco Resources' is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 23% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 110% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that to the industry, which is predicted to deliver 72% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Cerro de Pasco Resources' P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

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.

The fact that Cerro de Pasco Resources currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

It is also worth noting that we have found 2 warning signs for Cerro de Pasco Resources (1 doesn't sit too well with us!) that you need to take into consideration.

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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.