Subdued Growth No Barrier To KGHM Polska Miedz S.A. (WSE:KGH) With Shares Advancing 26%

Despite an already strong run, KGHM Polska Miedz S.A. (WSE:KGH) shares have been powering on, with a gain of 26% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 24% is also fairly reasonable.

Following the firm bounce in price, given close to half the companies operating in Poland's Metals and Mining industry have price-to-sales ratios (or "P/S") below 0.5x, you may consider KGHM Polska Miedz as a stock to potentially avoid with its 1.1x 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 as high as it is.

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See our latest analysis for KGHM Polska Miedz

What Does KGHM Polska Miedz's P/S Mean For Shareholders?

KGHM Polska Miedz's revenue growth of late has been pretty similar to most other companies. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

In order to justify its P/S ratio, KGHM Polska Miedz would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a decent 6.6% gain to the company's revenues. The latest three year period has also seen a 6.5% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 2.7% per annum during the coming three years according to the eight analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 4.4% each year, which is not materially different.

With this information, we find it interesting that KGHM Polska Miedz is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Final Word

The large bounce in KGHM Polska Miedz's shares has lifted the company's P/S handsomely. 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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that KGHM Polska Miedz currently trades on a higher than expected P/S. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for KGHM Polska Miedz with six simple checks.

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.

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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.