Pacific Metals Co., Ltd.'s (TSE:5541) 27% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Pacific Metals Co., Ltd. (TSE:5541) shares have been powering on, with a gain of 27% in the last thirty days. The last 30 days bring the annual gain to a very sharp 41%.

Following the firm bounce in price, you could be forgiven for thinking Pacific Metals is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 2.6x, considering almost half the companies in Japan's Metals and Mining industry have P/S ratios below 0.4x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Pacific Metals

How Has Pacific Metals Performed Recently?

Pacific Metals hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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

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

Pacific Metals' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 26%. This means it has also seen a slide in revenue over the longer-term as revenue is down 72% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue growth is heading into negative territory, declining 0.3% per annum over the next three years. With the industry predicted to deliver 1.0% growth per annum, that's a disappointing outcome.

In light of this, it's alarming that Pacific Metals' P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh heavily on the share price eventually.

The Key Takeaway

Pacific Metals' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

We've established that Pacific Metals currently trades on a much higher than expected P/S for a company whose revenues are forecast to decline. In cases like this where we see revenue decline on the horizon, we suspect the share price is at risk of following suit, bringing back the high P/S into the realms of suitability. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 2 warning signs we've spotted with Pacific Metals (including 1 which makes us a bit uncomfortable).

If you're unsure about the strength of Pacific Metals' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.