Orla Mining Ltd.'s (TSE:OLA) 25% Share Price Surge Not Quite Adding Up

Despite an already strong run, Orla Mining Ltd. (TSE:OLA) shares have been powering on, with a gain of 25% in the last thirty days. The annual gain comes to 202% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given around half the companies in Canada's Metals and Mining industry have price-to-sales ratios (or "P/S") below 3.5x, you may consider Orla Mining as a stock to avoid entirely with its 10.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

We've discovered 1 warning sign about Orla Mining. View them for free.

Check out our latest analysis for Orla Mining

What Does Orla Mining's Recent Performance Look Like?

Orla Mining certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Orla Mining will help you uncover what's on the horizon.

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

In order to justify its P/S ratio, Orla Mining would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 47% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 35% each year during the coming three years according to the four analysts following the company. With the industry predicted to deliver 56% growth per year, the company is positioned for a weaker revenue result.

In light of this, it's alarming that Orla Mining's 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. 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.

What We Can Learn From Orla Mining's P/S?

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

Despite analysts forecasting some poorer-than-industry revenue growth figures for Orla Mining, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

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

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.