There's Reason For Concern Over Century Aluminum Company's (NASDAQ:CENX) Massive 31% Price Jump

Century Aluminum Company (NASDAQ:CENX) shares have continued their recent momentum with a 31% gain in the last month alone. The last month tops off a massive increase of 210% in the last year.

Even after such a large jump in price, there still wouldn't be many who think Century Aluminum's price-to-sales (or "P/S") ratio of 1.1x is worth a mention when the median P/S in the United States' Metals and Mining industry is similar at about 1.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Century Aluminum

What Does Century Aluminum's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Century Aluminum's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

Is There Some Revenue Growth Forecasted For Century Aluminum?

In order to justify its P/S ratio, Century Aluminum would need to produce growth that's similar to 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 4.6%. Regardless, revenue has managed to lift by a handy 8.2% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Turning to the outlook, the next year should generate growth of 9.7% as estimated by the dual analysts watching the company. That's shaping up to be materially lower than the 14% growth forecast for the broader industry.

With this information, we find it interesting that Century Aluminum is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Century Aluminum's P/S Mean For Investors?

Century Aluminum's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

Our look at the analysts forecasts of Century Aluminum's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Century Aluminum that you need to be mindful of.

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

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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.