The Scotgold Resources Limited (LON:SGZ) share price has fared very poorly over the last month, falling by a substantial 62%. For any long-term shareholders, the last month ends a year to forget by locking in a 77% share price decline.

Since its price has dipped substantially, Scotgold Resources may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.9x, since almost half of all companies in the Metals and Mining industry in the United Kingdom have P/S ratios greater than 1.5x and even P/S higher than 8x 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.

See our latest analysis for Scotgold Resources

How Has Scotgold Resources Performed Recently?

With revenue growth that's exceedingly strong of late, Scotgold Resources has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Scotgold Resources will help you shine a light on its historical performance.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as Scotgold Resources' is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered an exceptional 210% gain to the company's top line. Still, revenue has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Weighing the recent medium-term upward revenue trajectory against the broader industry's one-year forecast for contraction of 3.3% shows it's a great look while it lasts.

With this information, we find it very odd that Scotgold Resources is trading at a P/S lower than the industry. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Scotgold Resources' P/S?

The southerly movements of Scotgold Resources' shares means its P/S is now sitting at a pretty low level. 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.

Looking at the figures, it's surprising to see Scotgold Resources currently trades on a much lower than expected P/S since its recent three-year revenue growth is beating forecasts for a struggling industry. One assumption would be that there are some underlying risks to revenue that are keeping the P/S from rising to match the its strong performance. The most obvious risk is that its revenue trajectory may not keep outperforming under these tough industry conditions. It appears many are indeed anticipating revenue instability, because this relative performance should normally provide a boost to the share price.

Plus, you should also learn about these 5 warning signs we've spotted with Scotgold Resources (including 3 which don't sit too well with us).

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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