Little Excitement Around Strike Energy Limited's (ASX:STX) Revenues

Strike Energy Limited's (ASX:STX) price-to-sales (or "P/S") ratio of 4.9x might make it look like a buy right now compared to the Oil and Gas industry in Australia, where around half of the companies have P/S ratios above 8.1x and even P/S above 388x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Strike Energy

What Does Strike Energy's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Strike Energy has been doing relatively well. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. 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.

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How Is Strike Energy's Revenue Growth Trending?

In order to justify its P/S ratio, Strike Energy would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 59% last year. Still, revenue has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Looking ahead now, revenue is anticipated to climb by 20% per year during the coming three years according to the six analysts following the company. With the industry predicted to deliver 340% growth per annum, the company is positioned for a weaker revenue result.

In light of this, it's understandable that Strike Energy's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

As we suspected, our examination of Strike Energy's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Strike Energy is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Strike Energy, 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.