Valeura Energy Inc.'s (TSE:VLE) Price Is Right But Growth Is Lacking After Shares Rocket 26%

Valeura Energy Inc. (TSE:VLE) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The annual gain comes to 118% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, Valeura Energy's price-to-sales (or "P/S") ratio of 1x 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 2.2x and even P/S above 5x 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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Check out our latest analysis for Valeura Energy

What Does Valeura Energy's Recent Performance Look Like?

Valeura Energy could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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How Is Valeura Energy's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 4.6% gain to the company's revenues. While this performance is only fair, the company was still able to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue growth is heading into negative territory, declining 16% over the next year. That's not great when the rest of the industry is expected to grow by 6.5%.

With this information, we are not surprised that Valeura Energy is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does Valeura Energy's P/S Mean For Investors?

The latest share price surge wasn't enough to lift Valeura Energy's P/S close to the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Valeura Energy's analyst forecasts revealed that its outlook for shrinking revenue 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. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Valeura Energy you should be aware of.

If you're unsure about the strength of Valeura Energy's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.