Zephyr Energy plc's (LON:ZPHR) P/S Is Still On The Mark Following 28% Share Price Bounce

Zephyr Energy plc (LON:ZPHR) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 38% over that time.

Since its price has surged higher, given close to half the companies operating in the United Kingdom's Oil and Gas industry have price-to-sales ratios (or "P/S") below 1x, you may consider Zephyr Energy as a stock to potentially avoid with its 2.5x P/S ratio. 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

Zephyr Energy's negative revenue growth of late has neither been better nor worse than most other companies. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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?

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, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 8.2%. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next year should generate growth of 13% as estimated by the sole analyst watching the company. With the industry only predicted to deliver 1.2%, the company is positioned for a stronger revenue result.

With this information, we can see why Zephyr Energy is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Zephyr Energy's P/S

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 is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Zephyr Energy that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.