First Majestic Silver Corp.'s (TSE:AG) 35% Share Price Surge Not Quite Adding Up

First Majestic Silver Corp. (TSE:AG) shares have continued their recent momentum with a 35% gain in the last month alone. The annual gain comes to 105% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, First Majestic Silver may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 7.2x, since almost half of all companies in the Metals and Mining in Canada have P/S ratios under 5.5x and even P/S lower than 2x are not unusual. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for First Majestic Silver

What Does First Majestic Silver's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, First Majestic Silver has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on First Majestic Silver.

Is There Enough Revenue Growth Forecasted For First Majestic Silver?

First Majestic Silver's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 61%. Revenue has also lifted 28% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 12% each year over the next three years. That's shaping up to be materially lower than the 22% per year growth forecast for the broader industry.

In light of this, it's alarming that First Majestic Silver's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does First Majestic Silver's P/S Mean For Investors?

First Majestic Silver shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've concluded that First Majestic Silver currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 2 warning signs for First Majestic Silver (1 is concerning!) that we have uncovered.

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).

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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.