Pinning Down Alamos Gold Inc.'s (TSE:AGI) P/S Is Difficult Right Now
When close to half the companies in the Metals and Mining industry in Canada have price-to-sales ratios (or "P/S") below 2.2x, you may consider Alamos Gold Inc. (TSE:AGI) as a stock to avoid entirely with its 5.4x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
View our latest analysis for Alamos Gold
What Does Alamos Gold's P/S Mean For Shareholders?
Alamos Gold could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. If not, then existing shareholders may be very nervous about the viability of the share price.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Alamos Gold.
Do Revenue Forecasts Match The High P/S Ratio?
The only time you'd be truly comfortable seeing a P/S as steep as Alamos Gold's is when the company's growth is on track to outshine the industry decidedly.
Taking a look back first, we see that the company grew revenue by an impressive 26% last year. The latest three year period has also seen an excellent 41% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.
Shifting to the future, estimates from the eight analysts covering the company suggest revenue growth is heading into negative territory, declining 3.5% over the next year. With the industry predicted to deliver 16% growth, that's a disappointing outcome.
With this information, we find it concerning that Alamos Gold is trading at a P/S higher than the industry. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.
What Does Alamos Gold's P/S Mean For Investors?
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.
Our examination of Alamos Gold's analyst forecasts revealed that its shrinking revenue outlook isn't drawing down its high P/S anywhere near as much as we would have predicted. In cases like this where we see revenue decline on the horizon, we suspect the share price is at risk of following suit, bringing back the high P/S into the realms of suitability. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Alamos Gold with six simple checks.
If you're unsure about the strength of Alamos Gold's 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.
