Paranapanema S.A.'s (BVMF:PMAM3) 26% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

Simply Wall St · 10/15 09:03

Unfortunately for some shareholders, the Paranapanema S.A. (BVMF:PMAM3) share price has dived 26% in the last thirty days, prolonging recent pain. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 71% loss during that time.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Paranapanema's P/S ratio of 0.2x, since the median price-to-sales (or "P/S") ratio for the Metals and Mining industry in Brazil is also close to 0.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Paranapanema

ps-multiple-vs-industry
BOVESPA:PMAM3 Price to Sales Ratio vs Industry October 15th 2024

How Has Paranapanema Performed Recently?

As an illustration, revenue has deteriorated at Paranapanema over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Paranapanema, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Paranapanema's Revenue Growth Trending?

Paranapanema's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a frustrating 66% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 90% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 219% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Paranapanema's P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Final Word

Following Paranapanema's share price tumble, its P/S is just clinging on to the industry median P/S. 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 find it unexpected that Paranapanema trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 4 warning signs for Paranapanema (2 can't be ignored!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).