Investors Interested In Zephyr Energy plc's (LON:ZPHR) Revenues

Zephyr Energy plc's (LON:ZPHR) price-to-sales (or "P/S") ratio of 3.6x may look like a poor investment opportunity when you consider close to half the companies in the Oil and Gas industry in the United Kingdom have P/S ratios below 1.2x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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View our latest analysis for Zephyr Energy

How Zephyr Energy Has Been Performing

The recently shrinking revenue for Zephyr Energy has been in line with the industry. One possibility is that the P/S ratio is high because investors think the company can turn things around and break free from the broader downward trend in revenue. 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.

Do Revenue Forecasts Match The High P/S Ratio?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 10%. In spite of this, the company still managed to deliver immense revenue growth over the last three years. 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.

Looking ahead now, revenue is anticipated to remain buoyant, climbing by 64% during the coming year according to the two analysts following the company. That would be an excellent outcome when the industry is expected to decline by 0.9%.

In light of this, it's understandable that Zephyr Energy's P/S sits above the majority of other companies. 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

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the 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. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. We still remain cautious about the company's ability to keep swimming against the current of the broader industry turmoil. Although, if the company's prospects don't change they will continue to provide strong support to the share price.

Having said that, be aware Zephyr Energy is showing 4 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

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.