A Piece Of The Puzzle Missing From Vital Energy Inc.'s (CVE:VUX) 29% Share Price Climb

Those holding Vital Energy Inc. (CVE:VUX) shares would be relieved that the share price has rebounded 29% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 33% over that time.

Even after such a large jump in price, Vital Energy's price-to-sales (or "P/S") ratio of 0.7x might still 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 5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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View our latest analysis for Vital Energy

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

With revenue growth that's exceedingly strong of late, Vital Energy has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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 Vital Energy's earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Vital Energy?

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

If we review the last year of revenue growth, the company posted a terrific increase of 74%. The latest three year period has also seen a 25% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

It's interesting to note that the rest of the industry is similarly expected to grow by 5.9% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it odd that Vital Energy is trading at a P/S lower than the industry. Apparently some shareholders are more bearish than recent times would indicate and have been accepting lower selling prices.

What Does Vital Energy's P/S Mean For Investors?

The latest share price surge wasn't enough to lift Vital Energy's P/S close to the industry median. 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.

Our examination of Vital Energy revealed its three-year revenue trends looking similar to current industry expectations hasn't given the P/S the boost we expected, given that it's lower than the wider industry P/S, When we see industry-like revenue growth but a lower than expected P/S, we assume potential risks are what might be placing downward pressure on the share price. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Vital Energy (at least 1 which doesn't sit too well with us), and understanding these should be part of your investment process.

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.