Unpleasant Surprises Could Be In Store For Diamond Offshore Drilling, Inc.'s (NYSE:DO) Shares

There wouldn't be many who think Diamond Offshore Drilling, Inc.'s (NYSE:DO) price-to-sales (or "P/S") ratio of 1.4x is worth a mention when the median P/S for the Energy Services industry in the United States is similar at about 0.9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Diamond Offshore Drilling

How Has Diamond Offshore Drilling Performed Recently?

Recent times have been advantageous for Diamond Offshore Drilling as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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

How Is Diamond Offshore Drilling's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a terrific increase of 36%. Pleasingly, revenue has also lifted 42% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 5.3% each year over the next three years. With the industry predicted to deliver 9.1% growth each year, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Diamond Offshore Drilling's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

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.

When you consider that Diamond Offshore Drilling's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Before you take the next step, you should know about the 1 warning sign for Diamond Offshore Drilling that we have uncovered.

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.