Cavvy Energy Ltd.'s (TSE:CVVY) Share Price Boosted 28% But Its Business Prospects Need A Lift Too

Despite an already strong run, Cavvy Energy Ltd. (TSE:CVVY) shares have been powering on, with a gain of 28% in the last thirty days. The last 30 days bring the annual gain to a very sharp 38%.

In spite of the firm bounce in price, Cavvy Energy may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.7x, since almost half of all companies in the Oil and Gas industry in Canada have P/S ratios greater than 2.2x and even P/S higher than 5x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

See our latest analysis for Cavvy Energy

How Cavvy Energy Has Been Performing

For instance, Cavvy Energy's 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. 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.

Although there are no analyst estimates available for Cavvy Energy, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

Cavvy Energy's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 41%. As a result, revenue from three years ago have also fallen 46% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 6.4% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's understandable that Cavvy Energy's P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. 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 Cavvy Energy's P/S?

Despite Cavvy Energy's share price climbing recently, its P/S still lags most other companies. 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.

Our examination of Cavvy Energy confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

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

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