With American Resources Corporation (NASDAQ:AREC) It Looks Like You'll Get What You Pay For

When close to half the companies in the Oil and Gas industry in the United States have price-to-sales ratios (or "P/S") below 1.4x, you may consider American Resources Corporation (NASDAQ:AREC) as a stock to avoid entirely with its 3.5x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for American Resources

What Does American Resources' Recent Performance Look Like?

American Resources certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. 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 American Resources' future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like American Resources' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 133% gain to the company's top line. The latest three year period has also seen an excellent 118% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to remain buoyant, climbing by 118% per annum during the coming three years according to the two analysts following the company. Meanwhile, the broader industry is forecast to contract by 4.5% each year, which would indicate the company is doing very well.

With this in consideration, we understand why American Resources' P/S is a cut above its industry peers. At this time, shareholders aren't keen to offload something that is potentially eyeing a much more prosperous future.

The Key Takeaway

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 we anticipated, our review of American Resources' analyst forecasts shows that the company's better revenue forecast compared to a turbulent industry is a significant contributor to its high price-to-sales ratio. At this stage investors feel the potential for a deterioration in revenue is remote enough to justify paying a premium in the form of a high P/S. Our only concern is whether its revenue trajectory can keep outperforming under these tough industry conditions. Otherwise, it's hard to see the share price falling strongly in the near future under the current growth expectations.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with American Resources, and understanding should be part of your investment process.

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.