Western Region Gold Co., Ltd.'s (SHSE:601069) 33% Share Price Surge Not Quite Adding Up

Western Region Gold Co., Ltd. (SHSE:601069) shares have continued their recent momentum with a 33% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 45%.

After such a large jump in price, when almost half of the companies in China's Metals and Mining industry have price-to-sales ratios (or "P/S") below 1.5x, you may consider Western Region Gold as a stock probably not worth researching with its 2.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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See our latest analysis for Western Region Gold

How Has Western Region Gold Performed Recently?

Recent times have been quite advantageous for Western Region Gold as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Western Region Gold will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Western Region Gold would need to produce impressive growth in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 35%. Still, revenue has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 14% shows it's an unpleasant look.

With this in mind, we find it worrying that Western Region Gold's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

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

The large bounce in Western Region Gold's shares has lifted the company's P/S handsomely. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Western Region Gold revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Western Region Gold you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.