Investors Still Aren't Entirely Convinced By Soma Gold Corp.'s (CVE:SOMA) Revenues Despite 26% Price Jump

Soma Gold Corp. (CVE:SOMA) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 12% over that time.

In spite of the firm bounce in price, Soma Gold's price-to-sales (or "P/S") ratio of 0.6x might still make it look like a strong buy right now compared to the wider Metals and Mining industry in Canada, where around half of the companies have P/S ratios above 3.4x and even P/S above 22x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Soma Gold

How Has Soma Gold Performed Recently?

With revenue growth that's exceedingly strong of late, Soma Gold has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Although there are no analyst estimates available for Soma Gold, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Soma Gold's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as depressed as Soma Gold's is when the company's growth is on track to lag the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 31%. The strong recent performance means it was also able to grow revenue by 113% 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.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 19% shows it's noticeably more attractive.

In light of this, it's peculiar that Soma Gold's P/S sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What Does Soma Gold's P/S Mean For Investors?

Even after such a strong price move, Soma Gold's P/S still trails the rest of the industry. 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.

Our examination of Soma Gold revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Soma Gold that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.