Further Upside For Sotkamo Silver AB (NGM:SOSI) Shares Could Introduce Price Risks After 33% Bounce

Sotkamo Silver AB (NGM:SOSI) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. But the last month did very little to improve the 67% share price decline over the last year.

Even after such a large jump in price, Sotkamo Silver's price-to-sales (or "P/S") ratio of 0.5x might still make it look like a buy right now compared to the Metals and Mining industry in Sweden, where around half of the companies have P/S ratios above 1x and even P/S above 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for Sotkamo Silver

How Has Sotkamo Silver Performed Recently?

Sotkamo Silver 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. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Sotkamo Silver will help you uncover what's on the horizon.

Is There Any Revenue Growth Forecasted For Sotkamo Silver?

The only time you'd be truly comfortable seeing a P/S as low as Sotkamo Silver's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 1.4% decrease to the company's top line. Still, the latest three year period has seen an excellent 93% overall rise in revenue, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 1.9% per year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 0.2% each year, which is not materially different.

With this in consideration, we find it intriguing that Sotkamo Silver's P/S is lagging behind its industry peers. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Bottom Line On Sotkamo Silver's P/S

Despite Sotkamo Silver's share price climbing recently, its P/S still lags most other companies. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

It looks to us like the P/S figures for Sotkamo Silver remain low despite growth that is expected to be in line with other companies in the industry. When we see middle-of-the-road revenue growth like this, we assume it must be the potential risks that are what is placing pressure on the P/S ratio. It appears some are indeed anticipating revenue instability, because these conditions should normally provide more support to the share price.

It is also worth noting that we have found 5 warning signs for Sotkamo Silver (1 is a bit unpleasant!) that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.