Why Investors Shouldn't Be Surprised By Natural Gas Services Group, Inc.'s (NYSE:NGS) P/S

When close to half the companies in the Energy Services industry in the United States have price-to-sales ratios (or "P/S") below 1x, you may consider Natural Gas Services Group, Inc. (NYSE:NGS) as a stock to potentially avoid with its 1.7x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

See our latest analysis for Natural Gas Services Group

What Does Natural Gas Services Group's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Natural Gas Services Group has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For Natural Gas Services Group?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Natural Gas Services Group's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 44%. The strong recent performance means it was also able to grow revenue by 92% in total over the last three years. 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 dual analysts covering the company suggest revenue should grow by 18% over the next year. With the industry only predicted to deliver 9.5%, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Natural Gas Services Group's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Natural Gas Services Group's P/S?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Natural Gas Services Group's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Before you settle on your opinion, we've discovered 2 warning signs for Natural Gas Services Group that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com