Cerrado Gold Inc.'s (CVE:CERT) Shares Bounce 43% But Its Business Still Trails The Industry

Cerrado Gold Inc. (CVE:CERT) shares have continued their recent momentum with a 43% gain in the last month alone. The last month tops off a massive increase of 164% in the last year.

Although its price has surged higher, Cerrado Gold may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.4x, since almost half of all companies in the Metals and Mining industry in Canada have P/S ratios greater than 3.5x and even P/S higher than 26x 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.

We've discovered 1 warning sign about Cerrado Gold. View them for free.

See our latest analysis for Cerrado Gold

What Does Cerrado Gold's P/S Mean For Shareholders?

Revenue has risen firmly for Cerrado Gold recently, which is pleasing to see. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction 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 Cerrado Gold's earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Cerrado Gold?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Cerrado Gold's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 28% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 113% 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.

Comparing that to the industry, which is predicted to deliver 70% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we can see why Cerrado Gold is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Bottom Line On Cerrado Gold's P/S

Cerrado Gold's recent share price jump still sees fails to bring its P/S alongside the industry median. 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 Cerrado Gold confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Cerrado Gold is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Cerrado Gold's 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.