I’m using two valuation metrics to find the cheapest UK shares.
The price-to-sales (P/S) metric indicates a company’s revenue against its value. The ratio is calculated by taking a company’s market capitalisation and dividing it by the firm’s revenue over the past year.
The metric is normally used when a company isn’t making a profit. For example, I may use this more often when I’m looking at growth stocks. Tesla is one of the few companies making a profit in the EV industry, so using the P/S ratio, I can easily compared Tesla’s valuation against its peers.
Meanwhile, the price-to-earnings (P/E) ratio is more frequently used and is calculated by dividing the market value by the company’s earnings.
So, let’s take a look at the cheapest UK-listed shares using these metrics.
Polymetal (LSE:POLY) is an Anglo-Russian mining stock and its share price tanked after the Russian invasion of Ukraine. Sanctions have made it hard for the company to continue operating as normal.
The mining group has highlighted uncertainty around funding as a result of sanctions placed on Russian banks and the state as a whole.
It may also struggle to sell its main product, gold. Fellow Russian Petropavlovsk said that its sales fell after its main customer, Gazprombank, was placed on the European sanctions list.
It’s fair to say that gold mining stocks should be doing pretty well this year, but Polymetal isn’t. It’s down 89% over the past 12 months.
Following a solid showing in 2021, the company now trades with a P/E ratio of 1.1. Meanwhile it has a P/S ratio of 0.3. Both of these figures are exceptionally low, correctly suggesting that something is wrong.
On the plus side, Polymetal expects to produce 1.7m ounces of gold this year — 1.2m oz in Russia and 500,000 oz in non-sanctioned Kazakhstan.
Ferrexpo (LSE:FXPO) is a Swiss-based miner with operations in Ukraine. The stock also collapsed following Russia’s invasion of Ukraine. It’s down 76% over the past 12 months.
Some 70% of Ferrexpo’s mines are in Ukraine. Last week, the firm announced that total iron ore pellet production fell 27% on the year to 2.1m tonnes during the second quarter. First-half sales were down 21% on the year to 4.4m tonnes.
The fall is production was naturally attributed to the war. However, the company vowed to continue its operations despite a very difficult operating environment.
Iron ore prices have been pretty strong throughout most of the year, so I’d expect Ferrexpo to be doing pretty well if it wasn’t for the war.
Currently Ferrexpo is trading with a P/E ratio of 0.85. It has a P/S ratio of 0.25. Once again, these are exceptionally low figures that correctly indicate that something isn’t right.
Would I buy either of these stocks?
I actually owned Polymetal shares before the war, and I bought some more when the stock collapsed as a very speculative investment.
Based on the same logic, of a speculative approach, I’d also put a limited amount of money into Ferrexpo shares too.
But it would be a huge gamble. It’s not so much about the assessing the fundamentals of these companies. Instead it’s about predicting or guessing when the war will be over and when sanctions may be removed. That’s a tough call.