Chesapeake Energy Corporation's (NASDAQ:CHK) Shares May Have Run Too Fast Too Soon

There wouldn't be many who think Chesapeake Energy Corporation's (NASDAQ:CHK) price-to-sales (or "P/S") ratio of 2.5x is worth a mention when the median P/S for the Oil and Gas industry in the United States is similar at about 2.2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Chesapeake Energy

What Does Chesapeake Energy's Recent Performance Look Like?

With revenue that's retreating more than the industry's average of late, Chesapeake Energy has been very sluggish. One possibility is that the P/S is moderate because investors think the company's revenue trend will eventually fall in line with most others in the industry. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chesapeake Energy.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Chesapeake Energy's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 64%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 8.5% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue growth is heading into negative territory, declining 14% over the next year. With the industry predicted to deliver 7.2% growth, that's a disappointing outcome.

With this in consideration, we think it doesn't make sense that Chesapeake Energy's P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

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

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.

It appears that Chesapeake Energy currently trades on a higher than expected P/S for a company whose revenues are forecast to decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Chesapeake Energy that you should be aware of.

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.

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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.