Subdued Growth No Barrier To KGHM Polska Miedz S.A.'s (WSE:KGH) Price

There wouldn't be many who think KGHM Polska Miedz S.A.'s (WSE:KGH) price-to-sales (or "P/S") ratio of 0.8x is worth a mention when the median P/S for the Metals and Mining industry in Poland is similar at about 0.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for KGHM Polska Miedz

How KGHM Polska Miedz Has Been Performing

Recent times have been more advantageous for KGHM Polska Miedz as its revenue hasn't fallen as much as the rest of the industry. It might be that many expect the comparatively superior revenue performance to vanish, which has kept the P/S from rising. You'd much rather the company continue improving its revenue if you still believe in the business. In saying that, existing shareholders probably aren't too pessimistic about the share price if the company's revenue continues outplaying the industry.

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

Do Revenue Forecasts Match The P/S Ratio?

KGHM Polska Miedz's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 6.5%. Regardless, revenue has managed to lift by a handy 28% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 4.6% each year as estimated by the eight analysts watching the company. With the industry predicted to deliver 236% growth per year, the company is positioned for a weaker revenue result.

In light of this, it's curious that KGHM Polska Miedz's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Given that KGHM Polska Miedz's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for KGHM Polska Miedz with six simple checks will allow you to discover any risks that could be an issue.

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.

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