Southern Energy Corp.'s (CVE:SOU) Price Is Right But Growth Is Lacking After Shares Rocket 36%

Southern Energy Corp. (CVE:SOU) shares have continued their recent momentum with a 36% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 5.6% isn't as attractive.

Even after such a large jump in price, Southern Energy may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.7x, since almost half of all companies in the Oil and Gas industry in Canada have P/S ratios greater than 2.8x 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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See our latest analysis for Southern Energy

What Does Southern Energy's Recent Performance Look Like?

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 low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. Those who are bullish on Southern Energy will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

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.

How Is Southern Energy's Revenue Growth Trending?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 2.2%. As a result, revenue from three years ago have also fallen 58% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 4.7% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why Southern Energy's P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Southern Energy's P/S?

Despite Southern Energy's share price climbing recently, its P/S still lags most other companies. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Southern Energy revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 5 warning signs for Southern Energy you should be aware of, and 3 of them don't sit too well with us.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.