Despite an already strong run, Golconda Gold Ltd. (CVE:GG) shares have been powering on, with a gain of 27% in the last thirty days. The annual gain comes to 160% following the latest surge, making investors sit up and take notice.
Although its price has surged higher, Golconda Gold’s price-to-sales (or “P/S”) ratio of 1.7x might still make it look like a buy right now compared to the Metals and Mining industry in Canada, where around half of the companies have P/S ratios above 3.6x and even P/S above 22x are quite common. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the reduced P/S.
See our latest analysis for Golconda Gold
How Golconda Gold Has Been Performing
Golconda Gold has been doing a decent job lately as it’s been growing revenue at a reasonable pace. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. Those who are bullish on Golconda Gold will be hoping that this isn’t the case, so that they can pick up the stock at a lower valuation.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Golconda Gold will help you shine a light on its historical performance.
What Are Revenue Growth Metrics Telling Us About The Low P/S?
Golconda Gold’s P/S ratio would be typical for a company that’s only expected to deliver limited growth, and importantly, perform worse than the industry.
Retrospectively, the last year delivered a decent 5.2% gain to the company’s revenues. However, due to its less than impressive performance prior to this period, revenue growth is practically non-existent over the last three years overall. Therefore, it’s fair to say that revenue growth has been inconsistent recently for the company.
This is in contrast to the rest of the industry, which is expected to grow by 21% over the next year, materially higher than the company’s recent medium-term annualised growth rates.
With this information, we can see why Golconda Gold is trading at a P/S lower than the industry. Apparently many shareholders weren’t comfortable holding on to something they believe will continue to trail the wider industry.
The Bottom Line On Golconda Gold’s P/S
Golconda Gold’s stock price has surged recently, but its but its P/S still remains modest. 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.
As we suspected, our examination of Golconda Gold revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won’t provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
Before you take the next step, you should know about the 3 warning signs for Golconda Gold (2 shouldn’t be ignored!) that we have uncovered.
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.