When you see that almost half of the companies in the Oil and Gas industry in the United States have price-to-sales ratios (or "P/S") below 1.6x, Expand Energy Corporation (NASDAQ:EXE) looks to be giving off strong sell signals with its 4.4x 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 Expand Energy
How Expand Energy Has Been Performing
Recent times have been advantageous for Expand Energy as its revenues have been rising faster than most other companies. 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.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Expand Energy.How Is Expand Energy's Revenue Growth Trending?
In order to justify its P/S ratio, Expand Energy would need to produce outstanding growth that's well in excess of the industry.
Taking a look back first, we see that the company grew revenue by an impressive 36% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 24% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.
Looking ahead now, revenue is anticipated to climb by 22% each year during the coming three years according to the analysts following the company. With the industry only predicted to deliver 6.3% per year, the company is positioned for a stronger revenue result.
In light of this, it's understandable that Expand Energy'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.
The Final Word
It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Expand Energy maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Oil and Gas industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
Plus, you should also learn about these 2 warning signs we've spotted with Expand Energy.
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.