Why We're Not Concerned Yet About Transocean Ltd.'s (NYSE:RIG) 26% Share Price Plunge

Transocean Ltd. (NYSE:RIG) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 50% in that time.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Transocean's P/S ratio of 0.7x, since the median price-to-sales (or "P/S") ratio for the Energy Services industry in the United States is also close to 0.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Transocean

What Does Transocean's Recent Performance Look Like?

Recent times have been advantageous for Transocean as its revenues have been rising faster than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

Is There Some Revenue Growth Forecasted For Transocean?

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

Taking a look back first, we see that the company grew revenue by an impressive 24% last year. Pleasingly, revenue has also lifted 38% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 3.2% per annum during the coming three years according to the eleven analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 4.6% each year, which is not materially different.

With this in mind, it makes sense that Transocean's P/S is closely matching its industry peers. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

The Bottom Line On Transocean's P/S

With its share price dropping off a cliff, the P/S for Transocean looks to be in line with the rest of the Energy Services industry. 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.

A Transocean's P/S seems about right to us given the knowledge that analysts are forecasting a revenue outlook that is similar to the Energy Services industry. At this stage investors feel the potential for an improvement or deterioration in revenue isn't great enough to push P/S in a higher or lower direction. All things considered, if the P/S and revenue estimates contain no major shocks, then it's hard to see the share price moving strongly in either direction in the near future.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Transocean with six simple checks on some of these key factors.

If you're unsure about the strength of Transocean's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.