Revenues Tell The Story For ShaMaran Petroleum Corp. (CVE:SNM) As Its Stock Soars 29%

ShaMaran Petroleum Corp. (CVE:SNM) shares have continued their recent momentum with a 29% gain in the last month alone. The annual gain comes to 244% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given close to half the companies operating in Canada's Oil and Gas industry have price-to-sales ratios (or "P/S") below 2x, you may consider ShaMaran Petroleum as a stock to potentially avoid with its 3.2x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

See our latest analysis for ShaMaran Petroleum

What Does ShaMaran Petroleum's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, ShaMaran Petroleum's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on ShaMaran Petroleum will help you uncover what's on the horizon.

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

There's an inherent assumption that a company should outperform the industry for P/S ratios like ShaMaran Petroleum's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 6.7% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 87% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 1.2%, which is noticeably less attractive.

In light of this, it's understandable that ShaMaran Petroleum's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

ShaMaran Petroleum shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

Our look into ShaMaran Petroleum shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for ShaMaran Petroleum (1 doesn't sit too well with us) 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.