There Is A Reason Kenmare Resources plc's (LON:KMR) Price Is Undemanding

With a price-to-sales (or "P/S") ratio of 0.7x Kenmare Resources plc (LON:KMR) may be sending very bullish signals at the moment, given that almost half of all the Metals and Mining companies in the United Kingdom have P/S ratios greater than 3.4x and even P/S higher than 16x are not unusual. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

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What Does Kenmare Resources' P/S Mean For Shareholders?

Kenmare Resources' revenue growth of late has been pretty similar to most other companies. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. Those who are bullish on Kenmare Resources will be hoping that this isn't the case.

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Do Revenue Forecasts Match The Low P/S Ratio?

Kenmare Resources' P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 9.6% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 12% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 0.1% per annum as estimated by the four analysts watching the company. That's shaping up to be materially lower than the 4.0% per year growth forecast for the broader industry.

With this in consideration, its clear as to why Kenmare Resources' P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What Does Kenmare Resources' P/S Mean For Investors?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Kenmare Resources maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Kenmare Resources you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.