Why Investors Shouldn't Be Surprised By GoGold Resources Inc.'s (TSE:GGD) 26% Share Price Surge

GoGold Resources Inc. (TSE:GGD) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 16% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking GoGold Resources is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 12.5x, considering almost half the companies in Canada's Metals and Mining industry have P/S ratios below 3x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for GoGold Resources

How Has GoGold Resources Performed Recently?

GoGold 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. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

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, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 20%. As a result, revenue from three years ago have also fallen 36% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 38% over the next year. That's shaping up to be materially higher than the 12% growth forecast for the broader industry.

With this in mind, it's not hard to understand why GoGold Resources' P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

GoGold Resources' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

As we suspected, our examination of GoGold Resources' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. 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.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.