Southern Energy Corp. (CVE:SOU) Might Not Be As Mispriced As It Looks After Plunging 30%

Unfortunately for some shareholders, the Southern Energy Corp. (CVE:SOU) share price has dived 30% in the last thirty days, prolonging recent pain. For any long-term shareholders, the last month ends a year to forget by locking in a 58% share price decline.

After such a large drop in price, Southern Energy's price-to-sales (or "P/S") ratio of 0.6x might 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 1.9x and even P/S above 5x are quite common. 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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Check out our latest analysis for Southern Energy

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

Southern Energy could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Southern Energy's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 30% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 14% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 18% during the coming year according to the lone analyst following the company. With the industry only predicted to deliver 4.8%, the company is positioned for a stronger revenue result.

In light of this, it's peculiar that Southern Energy's P/S sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

The southerly movements of Southern Energy's shares means its P/S is now sitting at a pretty low level. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Southern Energy's analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

You need to take note of risks, for example - Southern Energy has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you're unsure about the strength of Southern 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.