Australis Oil & Gas Limited (ASX:ATS) Surges 28% Yet Its Low P/S Is No Reason For Excitement

Australis Oil & Gas Limited (ASX:ATS) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 15% is also fairly reasonable.

Even after such a large jump in price, Australis Oil & Gas may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.6x, since almost half of all companies in the Oil and Gas industry in Australia have P/S ratios greater than 8.6x and even P/S higher than 477x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

View our latest analysis for Australis Oil & Gas

How Has Australis Oil & Gas Performed Recently?

For instance, Australis Oil & Gas' receding revenue in recent times would have to be some food for thought. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Australis Oil & Gas' earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Australis Oil & Gas?

In order to justify its P/S ratio, Australis Oil & Gas would need to produce anemic growth that's substantially trailing the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 18%. The last three years don't look nice either as the company has shrunk revenue by 37% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 787% shows it's an unpleasant look.

With this in mind, we understand why Australis Oil & Gas' P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What We Can Learn From Australis Oil & Gas' P/S?

Even after such a strong price move, Australis Oil & Gas' P/S still trails 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.

It's no surprise that Australis Oil & Gas maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Australis Oil & Gas, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Australis Oil & Gas, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.