Geo-Jade Petroleum Corporation (SHSE:600759) May Have Run Too Fast Too Soon With Recent 27% Price Plummet

Geo-Jade Petroleum Corporation (SHSE:600759) shares have had a horrible month, losing 27% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 10% share price drop.

In spite of the heavy fall in price, when almost half of the companies in China's Oil and Gas industry have price-to-sales ratios (or "P/S") below 1.2x, you may still consider Geo-Jade Petroleum as a stock not worth researching with its 3.5x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Geo-Jade Petroleum

What Does Geo-Jade Petroleum's Recent Performance Look Like?

For example, consider that Geo-Jade Petroleum's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Geo-Jade 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 Geo-Jade Petroleum's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Geo-Jade Petroleum's is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 6.3%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 20% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

It's interesting to note that the rest of the industry is similarly expected to grow by 6.4% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Geo-Jade Petroleum is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as a continuation of recent revenue trends would weigh down the share price eventually.

The Key Takeaway

A significant share price dive has done very little to deflate Geo-Jade Petroleum's very lofty P/S. 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.

Our look into Geo-Jade Petroleum has shown that it currently trades on a higher than expected P/S since its recent three-year growth is only in line with the wider industry forecast. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Geo-Jade Petroleum, and understanding should be part of your investment process.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.