Potential Upside For Arrow Exploration Corp. (CVE:AXL) Not Without Risk

With a median price-to-sales (or "P/S") ratio of close to 1.8x in the Oil and Gas industry in Canada, you could be forgiven for feeling indifferent about Arrow Exploration Corp.'s (CVE:AXL) P/S ratio of 2.2x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Arrow Exploration

How Has Arrow Exploration Performed Recently?

With revenue growth that's superior to most other companies of late, Arrow Exploration has been doing relatively well. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. 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 not quite in favour.

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

How Is Arrow Exploration's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Arrow Exploration's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company grew revenue by an impressive 215% last year. Revenue has also lifted 23% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Shifting to the future, estimates from the two analysts covering the company suggest revenue growth will be highly resilient over the next year growing by 148%. With the rest of the industry predicted to shrink by 5.6%, that would be a fantastic result.

With this information, we find it odd that Arrow Exploration is trading at a fairly similar P/S to the industry. It looks like most investors aren't convinced the company can achieve positive future growth in the face of a shrinking broader industry.

The Key Takeaway

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We note that even though Arrow Exploration trades at a similar P/S as the rest of the industry, it far eclipses them in terms of forecasted revenue growth. There could be some unobserved threats to revenue preventing the P/S ratio from matching the positive outlook. The market could be pricing in the event that tough industry conditions will impact future revenues. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

Plus, you should also learn about these 3 warning signs we've spotted with Arrow Exploration (including 1 which is potentially serious).

If you're unsure about the strength of Arrow Exploration'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.