There's Reason For Concern Over Source Energy Services Ltd.'s (TSE:SHLE) Massive 38% Price Jump
Source Energy Services Ltd. (TSE:SHLE) shareholders would be excited to see that the share price has had a great month, posting a 38% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 10% in the last twelve months.
In spite of the firm bounce in price, it's still not a stretch to say that Source Energy Services' price-to-sales (or "P/S") ratio of 0.3x right now seems quite "middle-of-the-road" compared to the Energy Services industry in Canada, where the median P/S ratio is around 0.5x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Check out our latest analysis for Source Energy Services
How Has Source Energy Services Performed Recently?
While the industry has experienced revenue growth lately, Source Energy Services' revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Source Energy Services.What Are Revenue Growth Metrics Telling Us About The P/S?
Source Energy Services' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.
Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Still, the latest three year period has seen an excellent 72% overall rise in revenue, in spite of its uninspiring short-term performance. Therefore, it's fair to say the revenue growth recently has been great for the company, but investors will want to ask why it has slowed to such an extent.
Looking ahead now, revenue is anticipated to climb by 9.1% during the coming year according to the dual analysts following the company. That's shaping up to be materially lower than the 12% growth forecast for the broader industry.
In light of this, it's curious that Source Energy Services' P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.
The Final Word
Source Energy Services' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our look at the analysts forecasts of Source Energy Services' revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.
Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Source Energy Services (1 makes us a bit uncomfortable) you should be aware of.
If these risks are making you reconsider your opinion on Source Energy Services, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.