Metals Exploration plc's (LON:MTL) Price Is Right But Growth Is Lacking

When close to half the companies operating in the Metals and Mining industry in the United Kingdom have price-to-sales ratios (or "P/S") above 1.2x, you may consider Metals Exploration plc (LON:MTL) as an attractive investment with its 0.5x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Metals Exploration

What Does Metals Exploration's Recent Performance Look Like?

With its revenue growth in positive territory compared to the declining revenue of most other companies, Metals Exploration has been doing quite well of late. Perhaps the market is expecting future revenue performance to follow the rest of the industry downwards, which has kept the P/S suppressed. Those who are bullish on Metals Exploration will be hoping that this isn't the case and the company continues to beat out the industry.

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

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Metals Exploration would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 25% last year. The strong recent performance means it was also able to grow revenue by 46% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to plummet, contracting by 7.3% during the coming year according to the only analyst following the company. Meanwhile, the broader industry is forecast to moderate by 1.1%, which indicates the company should perform poorly indeed.

With this information, it's not too hard to see why Metals Exploration is trading at a lower P/S in comparison. However, when revenue shrink rapidly the P/S often shrinks too, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Metals Exploration's analyst forecasts revealed that its even shakier outlook against the industry is contributing factor to why its P/S is so low. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Although, we would be concerned whether the company can even maintain this level of performance under these tough industry conditions. In the meantime, unless the company's prospects improve they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 5 warning signs with Metals Exploration (at least 1 which doesn't sit too well with us), and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.