There's Reason For Concern Over First Majestic Silver Corp.'s (TSE:AG) Massive 26% Price Jump

First Majestic Silver Corp. (TSE:AG) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 151% 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 8.1x, since almost half of all companies in the Metals and Mining in Canada have P/S ratios under 6.3x 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.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

View our latest analysis for First Majestic Silver

How Has First Majestic Silver Performed Recently?

Recent times have been advantageous for First Majestic Silver as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on First Majestic Silver will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, First Majestic Silver would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered an exceptional 84% gain to the company's top line. Pleasingly, revenue has also lifted 42% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 14% each year as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 22% per year growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that First Majestic Silver's P/S is outpacing its industry peers. 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?

The large bounce in First Majestic Silver's shares has lifted the company's P/S handsomely. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It comes as a surprise to see First Majestic Silver trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with First Majestic Silver (at least 1 which doesn't sit too well with us), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on First Majestic Silver, explore our interactive list of high quality stocks to get an idea of what else is out there.

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.