Improved Revenues Required Before Canacol Energy Ltd (TSE:CNE) Stock's 28% Jump Looks Justified

Canacol Energy Ltd (TSE:CNE) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 42% over that time.

Even after such a large jump in price, Canacol Energy's price-to-sales (or "P/S") ratio of 0.3x might still make it look like a buy right now compared to the Oil and Gas industry in Canada, where around half of the companies have P/S ratios above 2x and even P/S above 7x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Canacol Energy

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

Recent times have been advantageous for Canacol Energy as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. 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.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Canacol Energy.

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

There's an inherent assumption that a company should underperform the industry for P/S ratios like Canacol Energy's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 14%. The solid recent performance means it was also able to grow revenue by 19% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 5.0% as estimated by the dual analysts watching the company. With the industry predicted to deliver 0.9% growth, that's a disappointing outcome.

With this in consideration, we find it intriguing that Canacol Energy's P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

The latest share price surge wasn't enough to lift Canacol Energy's P/S close to the industry median. 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.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Canacol Energy's P/S is on the lower end of the spectrum. As other companies in the industry are forecasting revenue growth, Canacol Energy's poor outlook justifies its low P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for Canacol Energy (1 makes us a bit uncomfortable!) that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.