Take Care Before Jumping Onto Interoil Exploration and Production ASA (OB:IOX) Even Though It's 29% Cheaper

To the annoyance of some shareholders, Interoil Exploration and Production ASA (OB:IOX) shares are down a considerable 29% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 76% loss during that time.

After such a large drop in price, it would be understandable if you think Interoil Exploration and Production is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.2x, considering almost half the companies in Norway's Oil and Gas industry have P/S ratios above 1.4x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Interoil Exploration and Production

What Does Interoil Exploration and Production's P/S Mean For Shareholders?

Interoil Exploration and Production has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. 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.

How Is Interoil Exploration and Production's Revenue Growth Trending?

In order to justify its P/S ratio, Interoil Exploration and Production would need to produce sluggish growth that's trailing the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 26%. The strong recent performance means it was also able to grow revenue by 167% in total over the last three years. 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 2.1% in the next 12 months, the company's positive momentum based on recent medium-term revenue results is a bright spot for the moment.

In light of this, it's quite peculiar that Interoil Exploration and Production's P/S sits below the majority of other companies. 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 recently weak share price has pulled its P/S back below other Oil and Gas companies. 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.

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. There could be some major unobserved threats to revenue preventing the P/S ratio from matching this positive performance. Perhaps there is some hesitation about the company's ability to stay its recent course and swim against the current of the broader industry turmoil. It appears many are indeed anticipating revenue instability, because this relative performance should normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Interoil Exploration and Production (at least 2 which are significant), and understanding these should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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.