Why Investors Shouldn't Be Surprised By Wesdome Gold Mines Ltd.'s (TSE:WDO) P/S

Wesdome Gold Mines Ltd.'s (TSE:WDO) price-to-sales (or "P/S") ratio of 4.9x may not look like an appealing investment opportunity when you consider close to half the companies in the Metals and Mining industry in Canada have P/S ratios below 2.9x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

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. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Wesdome Gold Mines.

Do Revenue Forecasts Match The High P/S Ratio?

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.

If we review the last year of revenue growth, the company posted a terrific increase of 25%. The strong recent performance means it was also able to grow revenue by 55% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 39% during the coming year according to the three analysts following the company. That's shaping up to be materially higher than the 12% growth forecast for the broader industry.

In light of this, it's understandable that Wesdome Gold Mines' P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Wesdome Gold Mines' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Wesdome Gold Mines with six simple checks on some of these key factors.

If you're unsure about the strength of Wesdome Gold Mines' 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.