What You Can Learn From GoGold Resources Inc.'s (TSE:GGD) P/S After Its 27% Share Price Crash

The GoGold Resources Inc. (TSE:GGD) share price has softened a substantial 27% over the previous 30 days, handing back much of the gains the stock has made lately. The last month has meant the stock is now only up 8.3% during the last year.

Although its price has dipped substantially, you could still be forgiven for thinking GoGold Resources is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 9.6x, considering almost half the companies in Canada's Metals and Mining industry have P/S ratios below 3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for GoGold Resources

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

Recent times haven't been great for GoGold Resources as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

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.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 43% drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 39% as estimated by the only analyst watching the company. That's shaping up to be materially higher than the 25% growth forecast for the broader industry.

With this information, we can see why GoGold Resources is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

GoGold Resources' shares may have suffered, but its P/S remains high. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of GoGold Resources' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for GoGold Resources with six simple checks on some of these key factors.

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.