Cerrado Gold Inc. (CVE:CERT) Shares Fly 29% But Investors Aren't Buying For Growth

Cerrado Gold Inc. (CVE:CERT) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 64% share price drop in the last twelve months.

In spite of the firm bounce in price, Cerrado Gold may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.2x, since almost half of all companies in the Metals and Mining industry in Canada have P/S ratios greater than 3.4x and even P/S higher than 21x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

Check out our latest analysis for Cerrado Gold

What Does Cerrado Gold's Recent Performance Look Like?

Recent times have been advantageous for Cerrado Gold as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

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

Cerrado Gold's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 17%. The strong recent performance means it was also able to grow revenue by 106% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 3.7% as estimated by the only analyst watching the company. Meanwhile, the rest of the industry is forecast to expand by 20%, which is noticeably more attractive.

With this information, we can see why Cerrado Gold 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.

What We Can Learn From Cerrado Gold's P/S?

Shares in Cerrado Gold have risen appreciably however, its P/S is still subdued. 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.

We've established that Cerrado Gold maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Cerrado Gold has 5 warning signs (and 3 which make us uncomfortable) we think you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.