Tethys Petroleum Limited (CVE:TPL) Could Be Riskier Than It Looks

Tethys Petroleum Limited's (CVE:TPL) price-to-sales (or "P/S") ratio of 1.5x 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 2.1x and even P/S above 7x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Tethys Petroleum

How Tethys Petroleum Has Been Performing

For instance, Tethys Petroleum's receding revenue in recent times would have to be some food for thought. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Tethys Petroleum's earnings, revenue and cash flow.

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

In order to justify its P/S ratio, Tethys Petroleum would need to produce sluggish growth that's trailing 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 13%. In spite of this, the company still managed to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company, but investors will want to ask why it is now in decline.

Comparing that to the industry, which is only predicted to deliver 8.0% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this in mind, we find it intriguing that Tethys Petroleum's P/S isn't as high compared to that of its industry peers. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We're very surprised to see Tethys Petroleum 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. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to perceive a likelihood of revenue fluctuations in the future.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Tethys Petroleum (1 is a bit unpleasant!) that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.