There's Reason For Concern Over NorAm Drilling AS' (OB:NORAM) Price

NorAm Drilling AS' (OB:NORAM) price-to-sales (or "P/S") ratio of 1.9x may not look like an appealing investment opportunity when you consider close to half the companies in the Energy Services industry in Norway have P/S ratios below 1.2x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

Check out our latest analysis for NorAm Drilling

How NorAm Drilling Has Been Performing

With revenue growth that's superior to most other companies of late, NorAm Drilling has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think NorAm Drilling's future stacks up against the industry? In that case, our free report is a great place to start.

How Is NorAm Drilling's Revenue Growth Trending?

NorAm Drilling's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered an exceptional 94% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 33% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 15% over the next year. With the industry predicted to deliver 32% growth, the company is positioned for a weaker revenue result.

With this information, we find it concerning that NorAm Drilling is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Final Word

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Despite analysts forecasting some poorer-than-industry revenue growth figures for NorAm Drilling, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - NorAm Drilling has 2 warning signs (and 1 which is potentially serious) we think you should know about.

If you're unsure about the strength of NorAm Drilling's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.