With a price-to-sales (or “P/S”) ratio of 1.2x Fortuna Silver Mines Inc. (TSE:FVI) may be sending bullish signals at the moment, given that almost half of all the Metals and Mining companies in Canada have P/S ratios greater than 1.9x and even P/S higher than 14x are not unusual. Although, it’s not wise to just take the P/S at face value as there may be an explanation why it’s limited.
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How Has Fortuna Silver Mines Performed Recently?
Recent times haven’t been great for Fortuna Silver Mines as its revenue has been rising slower than most other companies. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If you still like the company, you’d be hoping revenue doesn’t get any worse and that you could pick up some stock while it’s out of favour.
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What Are Revenue Growth Metrics Telling Us About The Low P/S?
Fortuna Silver Mines’ P/S ratio would be typical for a company that’s only expected to deliver limited growth, and importantly, perform worse than the industry.
Taking a look back first, we see that the company managed to grow revenues by a handy 3.7% last year. The latest three year period has also seen an excellent 203% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.
Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 3.9% each year as estimated by the dual analysts watching the company. That’s not great when the rest of the industry is expected to grow by 10% each year.
In light of this, it’s understandable that Fortuna Silver Mines’ P/S would sit below the majority of other companies. Nonetheless, there’s no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
What Does Fortuna Silver Mines’ P/S Mean For Investors?
It’s argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
It’s clear to see that Fortuna Silver Mines maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won’t provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
You should always think about risks. Case in point, we’ve spotted 2 warning signs for Fortuna Silver Mines you should be aware of.
If these risks are making you reconsider your opinion on Fortuna Silver Mines, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.