Pinning Down Wesdome Gold Mines Ltd.'s (TSE:WDO) P/S Is Difficult Right Now

When you see that almost half of the companies in the Metals and Mining industry in Canada have price-to-sales ratios (or "P/S") below 3.1x, Wesdome Gold Mines Ltd. (TSE:WDO) looks to be giving off some sell signals with its 4.5x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Wesdome Gold Mines

What Does Wesdome Gold Mines' P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Wesdome Gold Mines has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think Wesdome Gold Mines' 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?

The only time you'd be truly comfortable seeing a P/S as high as Wesdome Gold Mines' is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered an exceptional 56% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 112% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 15% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 44% per annum, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Wesdome Gold Mines' P/S is outpacing its industry peers. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Wesdome Gold Mines' P/S

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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Wesdome Gold Mines, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. 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. Take a look at our free balance sheet analysis for Wesdome Gold Mines with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Wesdome Gold Mines, 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.