Lacklustre Performance Is Driving OKEA ASA's (OB:OKEA) Low P/S

When close to half the companies operating in the Oil and Gas industry in Norway have price-to-sales ratios (or "P/S") above 0.8x, you may consider OKEA ASA (OB:OKEA) as an attractive investment with its 0.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for OKEA

What Does OKEA's P/S Mean For Shareholders?

With its revenue growth in positive territory compared to the declining revenue of most other companies, OKEA has been doing quite well of late. Perhaps the market is expecting future revenue performance to follow the rest of the industry downwards, which has kept the P/S suppressed. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on OKEA will help you uncover what's on the horizon.

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

The only time you'd be truly comfortable seeing a P/S as low as OKEA's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered an exceptional 26% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 191% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the four analysts covering the company are not good at all, suggesting revenue should decline by 9.7% per year over the next three years. With the rest of the industry predicted to shrink by 0.4% per year, it's a sub-optimal result.

In light of this, it's understandable that OKEA's P/S sits below the majority of other companies. Nonetheless, with revenue going quickly in reverse, it's not guaranteed that the P/S has found a floor yet. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On OKEA'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.

As we suspected, our examination of OKEA's analyst forecasts revealed that its even shakier outlook against the industry is contributing factor to why its P/S is so low. With such a gloomy outlook, investors feel the potential for an improvement in revenue isn't great enough to justify paying a premium resulting in a higher P/S ratio. Although, we would be concerned whether the company can even maintain this level of performance under these tough industry conditions. Given the current circumstances, it's difficult to envision any significant increase in the share price in the near term.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for OKEA with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of OKEA'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.