Cleveland-Cliffs Inc. (NYSE:CLF) Surges 26% Yet Its Low P/S Is No Reason For Excitement

Cleveland-Cliffs Inc. (NYSE:CLF) shares have continued their recent momentum with a 26% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 8.2% isn't as impressive.

Although its price has surged higher, Cleveland-Cliffs may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 0.4x, considering almost half of all companies in the Metals and Mining industry in the United States have P/S ratios greater than 3x and even P/S higher than 9x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

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See our latest analysis for Cleveland-Cliffs

What Does Cleveland-Cliffs' P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Cleveland-Cliffs' revenue has gone into reverse gear, which is not great. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

Is There Any Revenue Growth Forecasted For Cleveland-Cliffs?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Cleveland-Cliffs' to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 12%. The last three years don't look nice either as the company has shrunk revenue by 22% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 7.2% as estimated by the twelve analysts watching the company. With the industry predicted to deliver 17% growth, the company is positioned for a weaker revenue result.

With this information, we can see why Cleveland-Cliffs is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Cleveland-Cliffs' P/S

Even after such a strong price move, Cleveland-Cliffs' P/S still trails the rest of the industry. 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.

As we suspected, our examination of Cleveland-Cliffs' analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

Having said that, be aware Cleveland-Cliffs is showing 1 warning sign in our investment analysis, you should know about.

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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.