Why We're Not Concerned Yet About Metis Energy Limited's (SGX:L02) 27% Share Price Plunge

Unfortunately for some shareholders, the Metis Energy Limited (SGX:L02) share price has dived 27% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 40% in that time.

Although its price has dipped substantially, you could still be forgiven for thinking Metis Energy is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.2x, considering almost half the companies in Singapore's Shipping industry have P/S ratios below 2x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Metis Energy

What Does Metis Energy's Recent Performance Look Like?

The revenue growth achieved at Metis Energy over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Metis Energy's earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/S as steep as Metis Energy's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company grew revenue by an impressive 24% last year. Revenue has also lifted 18% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to decline by 9.2% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

With this information, we can see why Metis Energy is trading at a high P/S compared to the industry. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the industry. Nonetheless, with most other businesses facing an uphill battle, staying on its current revenue path is no certainty.

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

Metis Energy's shares may have suffered, but its P/S remains high. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As detailed previously, the strength of Metis Energy's recent revenue trends over the medium-term relative to a declining industry is part of the reason why it trades at a higher P/S than its industry counterparts. Right now shareholders are comfortable with the P/S as they are quite confident revenues aren't under threat. However, it'd be fair to raise concerns over whether this level of revenue performance will continue given the harsh conditions facing the industry. Although, if the company's relative performance doesn't change it will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Metis Energy (1 can't be ignored!) that you need to be mindful of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.