There's Reason For Concern Over Secure Energy Services Inc.'s (TSE:SES) Price

With a median price-to-sales (or "P/S") ratio of close to 0.4x in the Energy Services industry in Canada, you could be forgiven for feeling indifferent about Secure Energy Services Inc.'s (TSE:SES) P/S ratio, which comes in at about the same. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Secure Energy Services

How Secure Energy Services Has Been Performing

With revenue growth that's inferior to most other companies of late, Secure Energy Services has been relatively sluggish. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

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

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

Retrospectively, the last year delivered a decent 8.4% gain to the company's revenues. Pleasingly, revenue has also lifted 277% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the four analysts covering the company are not good at all, suggesting revenue should decline by 46% per year over the next three years. With the rest of the industry predicted to shrink by 7.6% per annum, it's a sub-optimal result.

In light of this, it's somewhat peculiar that Secure Energy Services' P/S sits in line with the majority of other companies. When revenue shrink rapidly the P/S often shrinks too, which could set up shareholders for future disappointment. There's potential for the P/S to fall to lower levels if the company doesn't improve its top-line growth.

The Key Takeaway

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.

Secure Energy Services' analyst forecasts have revealed that its even shakier outlook against the industry isn't impacting its P/S as much as we would have predicted. Even though the company's P/S is on par with the rest of the industry, the fact that it's revenue outlook is poorer than an already struggling industry suggests that the P/S isn't justified. We also have our reservations about the company's ability to sustain this level of performance amidst the challenging industry conditions. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 2 warning signs for Secure Energy Services (1 is potentially serious!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.