New Gold Inc.'s (TSE:NGD) 33% Price Boost Is Out Of Tune With Revenues

New Gold Inc. (TSE:NGD) shares have continued their recent momentum with a 33% gain in the last month alone. The annual gain comes to 127% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, it's still not a stretch to say that New Gold's price-to-sales (or "P/S") ratio of 3.1x right now seems quite "middle-of-the-road" compared to the Metals and Mining industry in Canada, where the median P/S ratio is around 3.4x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Check out our latest analysis for New Gold

What Does New Gold's Recent Performance Look Like?

New Gold's revenue growth of late has been pretty similar to most other companies. Perhaps the market is expecting future revenue performance to show no drastic signs of changing, justifying the P/S being at current levels. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

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How Is New Gold's Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 18% gain to the company's top line. As a result, it also grew revenue by 24% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 19% each year during the coming three years according to the six analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 57% per year, which is noticeably more attractive.

With this information, we find it interesting that New Gold is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What Does New Gold's P/S Mean For Investors?

New Gold appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

When you consider that New Gold's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

It is also worth noting that we have found 1 warning sign for New Gold that you need to take into consideration.

If you're unsure about the strength of New Gold's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.