Diversified Energy Company PLC's (LON:DEC) Shares Not Telling The Full Story

Diversified Energy Company PLC's (LON:DEC) price-to-sales (or "P/S") ratio of 0.9x 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 1.7x and even P/S above 12x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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See our latest analysis for Diversified Energy

What Does Diversified Energy's P/S Mean For Shareholders?

Recent times have been pleasing for Diversified Energy as its revenue has risen in spite of the industry's average revenue going into reverse. It might be that many expect the strong revenue performance to degrade substantially, possibly more than the industry, which has repressed the P/S. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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

Is There Any Revenue Growth Forecasted For Diversified Energy?

In order to justify its P/S ratio, Diversified Energy would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 64% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 27% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 56% as estimated by the four analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 1.9%, which is noticeably less attractive.

With this information, we find it odd that Diversified Energy is trading at a P/S lower than the industry. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On Diversified Energy's P/S

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.

A look at Diversified Energy's revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Diversified Energy (2 are significant!) that you should be aware of before investing here.

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.