Further Upside For Interoil Exploration and Production ASA (OB:IOX) Shares Could Introduce Price Risks After 212% Bounce

Interoil Exploration and Production ASA (OB:IOX) shares have had a really impressive month, gaining 212% 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 23% over that time.

Even after such a large jump in price, considering around half the companies operating in Norway's Oil and Gas industry have price-to-sales ratios (or "P/S") above 1.6x, you may still consider Interoil Exploration and Production as an solid investment opportunity with its 0.5x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Interoil Exploration and Production

How Interoil Exploration and Production Has Been Performing

Recent times have been quite advantageous for Interoil Exploration and Production as its revenue has been rising very briskly. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. Those who are bullish on Interoil Exploration and Production will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for Interoil Exploration and Production, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

Interoil Exploration and Production's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 48%. Pleasingly, revenue has also lifted 186% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that to the industry, which is predicted to shrink 3.5% in the next 12 months, the company's positive momentum based on recent medium-term revenue results is a bright spot for the moment.

With this information, we find it very odd that Interoil Exploration and Production is trading at a P/S lower than the industry. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Interoil Exploration and Production's P/S?

Interoil Exploration and Production's stock price has surged recently, but its but its P/S still remains modest. 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.

Our examination of Interoil Exploration and Production revealed that despite growing revenue over the medium-term in a shrinking industry, the P/S doesn't reflect this as it's lower than the industry average. We think potential risks might be placing significant pressure on the P/S ratio and share price. Amidst challenging industry conditions, perhaps a key concern is whether the company can sustain its superior revenue growth trajectory. While the chance of the share price dropping sharply is fairly remote, investors do seem to be anticipating future revenue instability.

Plus, you should also learn about these 5 warning signs we've spotted with Interoil Exploration and Production (including 3 which can't be ignored).

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.

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