Metis Energy Limited (SGX:L02) shares have had a horrible month, losing 30% after a relatively good period beforehand.    The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 33% in that time.  

In spite of the heavy fall in price, you could still be forgiven for thinking Metis Energy is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 9.5x, considering almost half the companies in Singapore's Shipping industry have P/S ratios below 1.9x.   Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.  

See our latest analysis for Metis Energy

SGX:L02 Price to Sales Ratio vs Industry September 21st 2023

What Does Metis Energy's P/S Mean For Shareholders?

Metis Energy has been doing a good job lately as it's been growing revenue at a solid pace.   One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future.  You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.    

Although there are no analyst estimates available for Metis Energy, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.  

What Are Revenue Growth Metrics Telling Us About The High P/S?  

In order to justify its P/S ratio, Metis Energy would need to produce outstanding growth that's well in excess of the industry.  

Retrospectively, the last year delivered an exceptional 24% gain to the company's top line.   Revenue has also lifted 18% in aggregate from three years ago, mostly thanks to the last 12 months of growth.  So we can start by confirming that the company has actually done a good job of growing revenue over that time.  

Weighing the recent medium-term upward revenue trajectory against the broader industry's one-year forecast for contraction of 17% shows it's a great look while it lasts.

With this in mind, it's clear to us why Metis Energy's P/S exceeds that of its industry peers.  Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the industry.  However, its current revenue trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.  

The Final Word

A significant share price dive has done very little to deflate Metis Energy's very lofty P/S.      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 see that Metis Energy justifiably maintains its high P/S on the merits of its recentthree-year revenue growth beating forecasts amidst struggling industry.  Right now shareholders are comfortable with the P/S as they are quite confident revenues aren't under threat.  We still remain cautious about the company's ability to stay its recent course and swim against the current of the broader industry turmoil.  Although, if the company's relative performance doesn't change it will continue to provide strong support to the share price.    

We don't want to rain on the parade too much, but we did also find 1 warning sign for Metis Energy that you need to be mindful of.  

If you're unsure about the strength of Metis Energy'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.