Benign Growth For Australis Oil & Gas Limited (ASX:ATS) Underpins Its Share Price

With a price-to-sales (or "P/S") ratio of 0.4x Australis Oil & Gas Limited (ASX:ATS) may be sending very bullish signals at the moment, given that almost half of all the Oil and Gas companies in Australia have P/S ratios greater than 4.1x and even P/S higher than 81x 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.

View our latest analysis for Australis Oil & Gas

How Has Australis Oil & Gas Performed Recently?

For example, consider that Australis Oil & Gas' financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. 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 out of favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Australis Oil & Gas will help you shine a light on its historical performance.

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

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Australis Oil & Gas' to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 17%. The last three years don't look nice either as the company has shrunk revenue by 15% 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 49% 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. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Australis Oil & Gas' P/S

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.

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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Australis Oil & Gas you should be aware of.

If you're unsure about the strength of Australis Oil & Gas' 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.