Star Energy Group Plc's (LON:STAR) Low P/S No Reason For Excitement

Star Energy Group Plc's (LON:STAR) price-to-sales (or "P/S") ratio of 0.2x might make it look like a buy right now compared to the Oil and Gas industry in the United Kingdom, where around half of the companies have P/S ratios above 1.3x and even P/S above 5x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Star Energy Group

What Does Star Energy Group's Recent Performance Look Like?

With only a limited decrease in revenue compared to most other companies of late, Star Energy Group has been doing relatively well. It might be that many expect the comparatively superior revenue performance to degrade substantially, which has repressed the P/S. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. But at the very least, you'd be hoping that revenue doesn't fall off a cliff completely if your plan is to pick up some stock while it's out of favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Star Energy Group.

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

The only time you'd be truly comfortable seeing a P/S as low as Star Energy Group's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 6.8% decrease to the company's top line. Even so, admirably revenue has lifted 77% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Shifting to the future, estimates from the one analyst covering the company are not good at all, suggesting revenue should decline by 8.9% per year over the next three years. Meanwhile, the broader industry is forecast to moderate by 0.09% per year, which indicates the company should perform poorly indeed.

With this information, it's not too hard to see why Star Energy Group is trading at a lower P/S in comparison. Nonetheless, with revenue going quickly in reverse, it's not guaranteed that the P/S has found a floor yet. Even just maintaining these prices could be difficult to achieve as the weak outlook is already weighing down the shares heavily.

The Key Takeaway

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As expected, our analysis of Star Energy Group's analyst forecasts confirms that the company's even more precarious outlook against the industry is a major contributor to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Although, we would be concerned whether the company can even maintain this level of performance under these tough industry conditions. In the meantime, unless the company's prospects improve they will continue to form a barrier for the share price around these levels.

You always need to take note of risks, for example - Star Energy Group has 1 warning sign we think you should be aware of.

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.