The Price Is Right For Zephyr Energy plc (LON:ZPHR)

When you see that almost half of the companies in the Oil and Gas industry in the United Kingdom have price-to-sales ratios (or "P/S") below 1.5x, Zephyr Energy plc (LON:ZPHR) looks to be giving off some sell signals with its 3.4x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

See our latest analysis for Zephyr Energy

How Has Zephyr Energy Performed Recently?

There hasn't been much to differentiate Zephyr Energy's and the industry's retreating revenue lately. It might be that many expect the company's revenue to strengthen positively despite the tough industry conditions, which has kept the P/S from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

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

The only time you'd be truly comfortable seeing a P/S as high as Zephyr Energy's is when the company's growth is on track to outshine the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.8%. In spite of this, the company still managed to deliver immense revenue growth over the last three years. So while the company has done a great job in the past, it's somewhat concerning to see revenue growth decline so harshly.

Looking ahead now, revenue is anticipated to remain buoyant, climbing by 146% during the coming year according to the dual analysts following the company. That would be an excellent outcome when the industry is expected to decline by 0.1%.

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 Key Takeaway

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 anticipated, our review of Zephyr Energy's analyst forecasts shows that the company's better revenue forecast compared to a turbulent industry is a significant contributor to its high price-to-sales ratio. 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. Our only concern is whether its revenue trajectory can keep outperforming under these tough industry conditions. Otherwise, it's hard to see the share price falling strongly in the near future under the current growth expectations.

Before you settle on your opinion, we've discovered 3 warning signs for Zephyr Energy that you should be aware of.

If these risks are making you reconsider your opinion on Zephyr Energy, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.