Petra Diamonds Limited (LON:PDL) Might Not Be As Mispriced As It Looks After Plunging 29%

Petra Diamonds Limited (LON:PDL) shares have had a horrible month, losing 29% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 40% in that time.

Since its price has dipped substantially, Petra Diamonds' price-to-sales (or "P/S") ratio of 0.3x might make it look like a buy right now compared to the Metals and Mining industry in the United Kingdom, where around half of the companies have P/S ratios above 1.4x and even P/S above 4x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Petra Diamonds

What Does Petra Diamonds' P/S Mean For Shareholders?

With revenue that's retreating more than the industry's average of late, Petra Diamonds has been very sluggish. Perhaps the market isn't expecting future revenue performance to improve, which has kept the P/S suppressed. You'd much rather the company improve its revenue performance if you still believe in the business. Or at the very least, you'd be hoping the revenue slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Keen to find out how analysts think Petra Diamonds' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Petra Diamonds' Revenue Growth Trending?

Petra Diamonds' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a frustrating 42% decrease to the company's top line. Even so, admirably revenue has lifted 34% in aggregate from three years ago, notwithstanding the last 12 months. 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.

Turning to the outlook, the next three years should generate growth of 16% each year as estimated by the five analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 0.4% per annum, which is noticeably less attractive.

With this in consideration, we find it intriguing that Petra Diamonds' P/S sits behind most of its industry peers. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

Petra Diamonds' recently weak share price has pulled its P/S back below other Metals and Mining companies. 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.

Petra Diamonds' analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

Before you take the next step, you should know about the 2 warning signs for Petra Diamonds (1 is a bit unpleasant!) that we have uncovered.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.