You may think that with a price-to-sales (or "P/S") ratio of 14.5x Sandstorm Gold Ltd. (TSE:SSL) is a stock to avoid completely, seeing as almost half of all the Metals and Mining companies in Canada have P/S ratios under 3.6x and even P/S lower than 1.5x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
Check out our latest analysis for Sandstorm Gold
How Sandstorm Gold Has Been Performing
Recent times haven't been great for Sandstorm Gold as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.
Want the full picture on analyst estimates for the company? Then our free report on Sandstorm Gold will help you uncover what's on the horizon.How Is Sandstorm Gold's Revenue Growth Trending?
Sandstorm Gold's 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 growth, the company posted a worthy increase of 2.8%. This was backed up an excellent period prior to see revenue up by 54% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.
Looking ahead now, revenue is anticipated to climb by 7.1% each year during the coming three years according to the six analysts following the company. With the industry predicted to deliver 47% growth per year, the company is positioned for a weaker revenue result.
With this in consideration, we believe it doesn't make sense that Sandstorm Gold's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 Sandstorm Gold's P/S?
Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've concluded that Sandstorm Gold currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Sandstorm Gold with six simple checks will allow you to discover any risks that could be an issue.
If these risks are making you reconsider your opinion on Sandstorm Gold, explore our interactive list of high quality stocks to get an idea of what else is out there.
Valuation is complex, but we're here to simplify it.
Discover if Sandstorm Gold might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.