After Leaping 26% Zephyr Energy plc (LON:ZPHR) Shares Are Not Flying Under The Radar

Zephyr Energy plc (LON:ZPHR) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 21% over that time.

Since its price has surged higher, you could be forgiven for thinking Zephyr Energy is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.2x, considering almost half the companies in the United Kingdom's Oil and Gas industry have P/S ratios below 1.1x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Zephyr Energy

How Zephyr Energy Has Been Performing

With revenue growth that's superior to most other companies of late, Zephyr Energy has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Zephyr Energy's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For Zephyr Energy?

In order to justify its P/S ratio, Zephyr Energy would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months. Still, revenue has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Looking ahead now, revenue is anticipated to remain buoyant, climbing by 23% during the coming year according to the one analyst following the company. With the rest of the industry predicted to shrink by 1.4%, that would be a fantastic result.

With this information, we can see why Zephyr Energy is trading at such a high P/S compared to the industry. Right now, investors are willing to pay more for a stock that is shaping up to buck the trend of the broader industry going backwards.

The Final Word

Zephyr Energy shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Zephyr Energy's analyst forecasts revealed that its superior revenue outlook against a shaky industry is contributing to its high P/S. Outperforming the industry in this manner looks to have provided investors with a bit of confidence that the future will be bright, bolstering the P/S. Questions could still raised over whether this level of outperformance can continue in the context of a a tumultuous industry climate. Assuming the company's outlook remains unchanged, the share price is likely to be supported by prospective buyers.

You need to take note of risks, for example - Zephyr Energy has 4 warning signs (and 1 which is concerning) we think you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.