Petra Diamonds Limited (LON:PDL) Surges 37% Yet Its Low P/S Is No Reason For Excitement

Explore Petra Diamonds's Fair Values from the Community and select yours

Petra Diamonds Limited (LON:PDL) shareholders are no doubt pleased to see that the share price has bounced 37% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 40% over that time.

Even after such a large jump in price, Petra Diamonds may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.1x, since almost half of all companies in the Metals and Mining industry in the United Kingdom have P/S ratios greater than 2.3x and even P/S higher than 8x are not unusual. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Petra Diamonds

What Does Petra Diamonds' Recent Performance Look Like?

Petra Diamonds has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Petra Diamonds will help you shine a light on its historical performance.

Is There Any Revenue Growth Forecasted For Petra Diamonds?

The only time you'd be truly comfortable seeing a P/S as depressed as Petra Diamonds' is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered a decent 13% gain to the company's revenues. Still, lamentably revenue has fallen 36% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to decline by 1.1% over the next year, or less than the company's recent medium-term annualised revenue decline.

With this information, it's not too hard to see why Petra Diamonds is trading at a lower P/S in comparison. However, when revenue shrink rapidly P/S often shrinks too, which could set up shareholders for future disappointment regardless. Even just maintaining these prices will be difficult to achieve as recent revenue trends are already weighing down the shares heavily.

The Key Takeaway

Petra Diamonds' recent share price jump still sees fails to bring its P/S alongside the industry median. 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 expected, our analysis of Petra Diamonds confirms that the company's severe contraction in revenue over the past three-year years is a major contributor to its lower than industry P/S, given the industry is set to decline less. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. However, we're still cautious about the company's ability to prevent an acceleration of its recent medium-term course and resist even greater pain to its business from the broader industry turmoil. For now though, it's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Petra Diamonds is showing 3 warning signs in our investment analysis, and 2 of those shouldn't be ignored.

If these risks are making you reconsider your opinion on Petra Diamonds, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.