Obsidian Energy Ltd.'s (TSE:OBE) Shares Not Telling The Full Story

With a price-to-sales (or "P/S") ratio of 0.6x Obsidian Energy Ltd. (TSE:OBE) may be sending bullish signals at the moment, given that almost half of all the Oil and Gas companies in Canada have P/S ratios greater than 1.9x and even P/S higher than 6x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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How Has Obsidian Energy Performed Recently?

Recent revenue growth for Obsidian Energy has been in line with the industry. It might be that many expect the mediocre revenue performance to degrade, which has repressed the P/S ratio. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.

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

The only time you'd be truly comfortable seeing a P/S as low as Obsidian Energy's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a decent 12% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 63% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next year should generate growth of 25% as estimated by the two analysts watching the company. With the industry only predicted to deliver 4.5%, the company is positioned for a stronger revenue result.

In light of this, it's peculiar that Obsidian Energy's P/S sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

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.

A look at Obsidian Energy's revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. There could be some major risk factors that are placing downward pressure on the P/S ratio. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Obsidian Energy with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Obsidian 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.