Wesdome Gold Mines Ltd.'s (TSE:WDO) Shareholders Might Be Looking For Exit

Wesdome Gold Mines Ltd.'s (TSE:WDO) price-to-sales (or "P/S") ratio of 5x might make it look like a sell right now compared to the Metals and Mining industry in Canada, where around half of the companies have P/S ratios below 3.6x and even P/S below 1.2x are quite common. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Wesdome Gold Mines

How Wesdome Gold Mines Has Been Performing

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. 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 Wesdome Gold Mines will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

Wesdome Gold Mines' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 34%. Pleasingly, revenue has also lifted 88% in aggregate from three years ago, thanks to the last 12 months of growth. 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 20% per annum during the coming three years according to the six analysts following the company. With the industry predicted to deliver 35% growth per year, the company is positioned for a weaker revenue result.

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. 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.

The Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've concluded that Wesdome Gold Mines 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Wesdome Gold Mines, and understanding should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.