Take Care Before Jumping Onto Prospera Energy Inc. (CVE:PEI) Even Though It's 33% Cheaper

Prospera Energy Inc. (CVE:PEI) shares have had a horrible month, losing 33% after a relatively good period beforehand. For any long-term shareholders, the last month ends a year to forget by locking in a 65% share price decline.

Since its price has dipped substantially, Prospera Energy may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.8x, 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 6x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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View our latest analysis for Prospera Energy

What Does Prospera Energy's P/S Mean For Shareholders?

Prospera Energy certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. Those who are bullish on Prospera Energy will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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Is There Any Revenue Growth Forecasted For Prospera Energy?

Prospera 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.

If we review the last year of revenue growth, the company posted a terrific increase of 74%. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

When compared to the industry's one-year growth forecast of 4.3%, the most recent medium-term revenue trajectory is noticeably more alluring

With this in mind, we find it intriguing that Prospera Energy's P/S isn't as high compared to that of its industry peers. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

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

Prospera Energy's recently weak share price has pulled its P/S back below other Oil and Gas companies. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We're very surprised to see Prospera Energy currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Prospera Energy that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.