GoGold Resources Inc.'s (TSE:GGD) Shares Climb 30% But Its Business Is Yet to Catch Up

GoGold Resources Inc. (TSE:GGD) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. The annual gain comes to 139% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, GoGold Resources may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 11.2x, when you consider almost half of the companies in the Metals and Mining industry in Canada have P/S ratios under 4.6x and even P/S lower than 2x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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Check out our latest analysis for GoGold Resources

What Does GoGold Resources' Recent Performance Look Like?

Recent times have been advantageous for GoGold Resources as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

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

GoGold Resources' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 104% last year. The latest three year period has also seen an excellent 60% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the one analyst covering the company suggest revenue growth is heading into negative territory, declining 0.5% over the next year. That's not great when the rest of the industry is expected to grow by 40%.

In light of this, it's alarming that GoGold Resources' P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

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

Shares in GoGold Resources have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

For a company with revenues that are set to decline in the context of a growing industry, GoGold Resources' P/S is much higher than we would've anticipated. In cases like this where we see revenue decline on the horizon, we suspect the share price is at risk of following suit, bringing back the high P/S into the realms of suitability. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for GoGold Resources with six simple checks.

If these risks are making you reconsider your opinion on GoGold 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.