Even With A 30% Surge, Cautious Investors Are Not Rewarding Southern Energy Corp.'s (CVE:SOU) Performance Completely

Southern Energy Corp. (CVE:SOU) shares have continued their recent momentum with a 30% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 45% over that time.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Southern Energy's P/S ratio of 1.9x, since the median price-to-sales (or "P/S") ratio for the Oil and Gas industry in Canada is also close to 2.3x. 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.

See our latest analysis for Southern Energy

How Southern Energy Has Been Performing

For example, consider that Southern Energy's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Southern Energy will help you shine a light on its historical performance.

Do Revenue Forecasts Match The P/S Ratio?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 56%. Still, the latest three year period has seen an excellent 64% overall rise in revenue, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Comparing that to the industry, which is only predicted to deliver 11% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this information, we find it interesting that Southern Energy is trading at a fairly similar P/S compared to the industry. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Final Word

Southern Energy appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

To our surprise, Southern Energy revealed its three-year revenue trends aren't contributing to its P/S as much as we would have predicted, given they look better than current industry expectations. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to see the likelihood of revenue fluctuations in the future.

You should always think about risks. Case in point, we've spotted 3 warning signs for Southern Energy you should be aware of.

If these risks are making you reconsider your opinion on Southern Energy, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.