Further Upside For Source Energy Services Ltd. (TSE:SHLE) Shares Could Introduce Price Risks After 48% Bounce

Despite an already strong run, Source Energy Services Ltd. (TSE:SHLE) shares have been powering on, with a gain of 48% in the last thirty days. This latest share price bounce rounds out a remarkable 317% gain over the last twelve months.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Source Energy Services' P/S ratio of 0.3x, since the median price-to-sales (or "P/S") ratio for the Energy Services industry in Canada is also close to 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

What Does Source Energy Services' P/S Mean For Shareholders?

Recent times have been advantageous for Source Energy Services as its revenues have been rising faster than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Keen to find out how analysts think Source Energy Services' future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The P/S?

The only time you'd be comfortable seeing a P/S like Source Energy Services' is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company grew revenue by an impressive 37% last year. Pleasingly, revenue has also lifted 128% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to remain somewhat buoyant, growing by 3.3% during the coming year according to the two analysts following the company. While this isn't a particularly impressive figure, it should be noted that the the industry is expected to decline by 15%.

Despite the marginal growth, we find it odd that Source Energy Services is trading at a fairly similar P/S to the industry. It looks like most investors aren't convinced the company can achieve positive future growth in the face of a shrinking broader industry.

The Final Word

Source Energy Services appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Source Energy Services currently trades on a lower than expected P/S since its growth forecasts are potentially beating a struggling industry. There could be some unobserved threats to revenue preventing the P/S ratio from matching the positive outlook. The market could be pricing in the event that tough industry conditions will impact future revenues. It appears some are indeed anticipating revenue instability, because the company's current prospects should normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Source Energy Services (3 are concerning) 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.