SouthGobi Resources Ltd. (CVE:SGQ) Could Be Riskier Than It Looks

With a price-to-sales (or "P/S") ratio of 0.2x SouthGobi Resources Ltd. (CVE:SGQ) may be sending bullish signals at the moment, given that almost half of all the Oil and Gas companies in Canada have P/S ratios greater than 2x and even P/S higher than 5x 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 SouthGobi Resources

How SouthGobi Resources Has Been Performing

Recent times have been quite advantageous for SouthGobi Resources as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. Those who are bullish on SouthGobi Resources will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

Is There Any Revenue Growth Forecasted For SouthGobi Resources?

There's an inherent assumption that a company should underperform the industry for P/S ratios like SouthGobi Resources' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 70%. The strong recent performance means it was also able to grow revenue by 268% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 4.4% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that SouthGobi Resources' P/S sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

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

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We're very surprised to see SouthGobi Resources currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It is also worth noting that we have found 3 warning signs for SouthGobi Resources (1 shouldn't be ignored!) that you need to take into consideration.

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).

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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.