The Market Lifts Tethys Petroleum Limited (CVE:TPL) Shares 45% But It Can Do More

Despite an already strong run, Tethys Petroleum Limited (CVE:TPL) shares have been powering on, with a gain of 45% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 89% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that Tethys Petroleum's price-to-sales (or "P/S") ratio of 2.2x right now seems quite "middle-of-the-road" compared to the Oil and Gas industry in Canada, seeing as it matches the P/S ratio of the wider industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Tethys Petroleum

How Tethys Petroleum Has Been Performing

As an illustration, revenue has deteriorated at Tethys Petroleum over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Tethys Petroleum, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Tethys Petroleum's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 13% decrease to the company's top line. The latest three year period has seen an incredible overall rise in revenue, a stark contrast to the last 12 months. 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 10% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

In light of this, it's curious that Tethys Petroleum's P/S sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Tethys Petroleum's P/S

Its shares have lifted substantially and now Tethys Petroleum's P/S is back within range of the industry median. 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've established that Tethys Petroleum currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Before you take the next step, you should know about the 3 warning signs for Tethys Petroleum (2 are potentially serious!) that we have uncovered.

If you're unsure about the strength of Tethys Petroleum'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.