Subdued Growth No Barrier To Zodiac Energy Limited (NSE:ZODIAC) With Shares Advancing 32%

Zodiac Energy Limited (NSE:ZODIAC) shares have continued their recent momentum with a 32% gain in the last month alone. This latest share price bounce rounds out a remarkable 318% gain over the last twelve months.

After such a large jump in price, you could be forgiven for thinking Zodiac Energy is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.9x, considering almost half the companies in India's Electrical industry have P/S ratios below 3.1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Zodiac Energy

How Has Zodiac Energy Performed Recently?

Zodiac Energy certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Zodiac Energy's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Zodiac Energy?

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

Retrospectively, the last year delivered an exceptional 33% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 115% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 30% shows it's about the same on an annualised basis.

With this in mind, we find it intriguing that Zodiac Energy's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From Zodiac Energy's P/S?

The large bounce in Zodiac Energy's shares has lifted the company's P/S handsomely. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We didn't expect to see Zodiac Energy trade at such a high P/S considering its last three-year revenue growth has only been on par with the rest of the industry. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Zodiac Energy (including 1 which shouldn't be ignored).

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

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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.