What Cerro de Pasco Resources Inc.'s (CVE:CDPR) 34% Share Price Gain Is Not Telling You

Despite an already strong run, Cerro de Pasco Resources Inc. (CVE:CDPR) shares have been powering on, with a gain of 34% in the last thirty days. The last month tops off a massive increase of 142% in the last year.

Following the firm bounce in price, you could be forgiven for thinking Cerro de Pasco Resources is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 9.4x, considering almost half the companies in Canada's Metals and Mining industry have P/S ratios below 3.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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View our latest analysis for Cerro de Pasco Resources

How Has Cerro de Pasco Resources Performed Recently?

As an illustration, revenue has deteriorated at Cerro de Pasco Resources over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Cerro de Pasco Resources?

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. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 58% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Cerro de Pasco Resources is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Key Takeaway

Cerro de Pasco Resources' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 Cerro de Pasco Resources revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Before you settle on your opinion, we've discovered 2 warning signs for Cerro de Pasco Resources (1 is concerning!) that you should be aware of.

If you're unsure about the strength of Cerro de Pasco Resources' 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.