In This Article:
When you see that almost half of the companies in the Oil and Gas industry in the United Kingdom have price-to-sales ratios (or "P/S") below 0.9x, Union Jack Oil plc (LON:UJO) looks to be giving off strong sell signals with its 3.9x 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 so lofty.
See our latest analysis for Union Jack Oil
What Does Union Jack Oil's Recent Performance Look Like?
With revenue growth that's superior to most other companies of late, Union Jack Oil has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. 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 Union Jack Oil.
What Are Revenue Growth Metrics Telling Us About The High P/S?
In order to justify its P/S ratio, Union Jack Oil would need to produce outstanding growth that's well in excess of the industry.
Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months. The amazing performance means it was also able to deliver huge revenue growth over the last three years. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.
Looking ahead now, revenue is anticipated to slump, contracting by 4.2% during the coming year according to the two analysts following the company. This is still shaping up to be materially better than the broader industry which is also set to decline 11%.
In light of this, it's understandable that Union Jack Oil's P/S sits above the majority of other companies. However, even though the company may outperform the industry, shrinking revenues are unlikely to make the P/S premium sustainable long-term. There is still potential for the P/S to fall to lower levels if the company doesn't improve its top-line growth.
The Bottom Line On Union Jack Oil's P/S
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.
We've concluded that Union Jack Oil maintains its high P/S on the strength of its revenue forecast relative to the struggling industry, as expected. At this stage investors feel the potential for outperforming a struggling industry justifies a higher P/S than other companies in the space. We still remain cautious about the company's ability to keep resisting the broader industry turmoil. Although, given a rosier outlook than other industry players, the share price shouldn't see any major shocks.