Essential Energy Services Ltd. (TSE:ESN) Could Be Riskier Than It Looks
There wouldn't be many who think Essential Energy Services Ltd.'s (TSE:ESN) price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S for the Energy Services industry in Canada is similar at about 0.5x. 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 Essential Energy Services
What Does Essential Energy Services' Recent Performance Look Like?
Essential Energy Services could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.
Keen to find out how analysts think Essential Energy Services' future stacks up against the industry? In that case, our free report is a great place to start.
Is There Some Revenue Growth Forecasted For Essential Energy Services?
The only time you'd be comfortable seeing a P/S like Essential Energy Services' is when the company's growth is tracking the industry closely.
If we review the last year of revenue growth, the company posted a terrific increase of 23%. As a result, it also grew revenue by 17% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.
Shifting to the future, estimates from the lone analyst covering the company suggest revenue growth will show minor resilience over the next year growing only by 4.8%. While this isn't a particularly impressive figure, it should be noted that the the industry is expected to decline by 1.1%.
Even though the growth is only slight, it's peculiar that Essential Energy Services' P/S sits in line with the majority of other companies given the industry is set for a decline. It looks like most investors aren't convinced the company can achieve positive future growth in the face of a shrinking broader industry.
What Does Essential Energy Services' P/S Mean For Investors?
We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We note that even though Essential Energy Services trades at a similar P/S as the rest of the industry, it far eclipses them in terms of forecasted revenue growth. Given the glowing revenue forecasts, we can only assume potential risks are what might be capping the P/S ratio at its current levels. Perhaps there is some hesitation about the company's ability to keep swimming against the current of the broader industry turmoil. It appears some are indeed anticipating revenue instability, because the company's current prospects should normally provide a boost to the share price.
It is also worth noting that we have found 2 warning signs for Essential Energy Services that you need to take into consideration.
If these risks are making you reconsider your opinion on Essential Energy Services, explore our interactive list of high quality stocks to get an idea of what else is out there.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
