Some Shareholders Feeling Restless Over China Gold International Resources Corp. Ltd.'s (TSE:CGG) P/S Ratio

China Gold International Resources Corp. Ltd.'s (TSE:CGG) price-to-sales (or "P/S") ratio of 5x might make it look like a sell right now compared to the Metals and Mining industry in Canada, where around half of the companies have P/S ratios below 3.4x and even P/S below 1.2x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for China Gold International Resources

How China Gold International Resources Has Been Performing

China Gold International Resources hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think China Gold International Resources' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For China Gold International Resources?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 17%. This means it has also seen a slide in revenue over the longer-term as revenue is down 51% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 73% over the next year. That's shaping up to be materially lower than the 91% growth forecast for the broader industry.

With this information, we find it concerning that China Gold International Resources is trading at a P/S higher than the industry. 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. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On China Gold International Resources' P/S

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

It comes as a surprise to see China Gold International Resources trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for China Gold International Resources with six simple checks on some of these key factors.

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

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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.