Benign growth for Burgundy Diamond Mines Limited underpins its Share price

With a price-to-sales ratio of 0.1x Burgundy Diamond Mines Limited may be sending very bullish signals at the moment, given that almost half of all the Metals and Mining companies in Australia have P/S ratios greater than 55.2x and even P/S higher than 320x are not unusual. However, it’s not wise to just take the P/S at face value as there may be an explanation for why it’s so limited.

Burgundy Diamond Mines would need to produce anaemic growth that’s substantially trailing the industry. In reviewing the last year of financials, the company’s revenues fell to the tune of 14%. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. Accordingly, shareholders probably wouldn’t have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue growth is heading into negative territory, declining 14% per year over the next three years. Now, Burgundy Diamond Mines’ P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There’s potential for the P/S to fall to even lower levels if the company doesn’t improve its top-line growth.