When close to half the companies in the Energy Services industry in the United States have price-to-sales ratios (or "P/S") below 0.9x, you may consider Diamond Offshore Drilling, Inc. (NYSE:DO) as a stock to potentially avoid with its 1.4x P/S ratio.   Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.  

View our latest analysis for Diamond Offshore Drilling

NYSE:DO Price to Sales Ratio vs Industry December 18th 2023

What Does Diamond Offshore Drilling's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Diamond Offshore Drilling 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.    

Keen to find out how analysts think Diamond Offshore Drilling's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Diamond Offshore Drilling's Revenue Growth Trending?  

In order to justify its P/S ratio, Diamond Offshore Drilling would need to produce impressive growth in excess of the industry.  

Retrospectively, the last year delivered an exceptional 30% gain to the company's top line.   The latest three year period has also seen a 15% overall rise in revenue, aided extensively by its short-term performance.  Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.  

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 7.0% per annum over the next three years.  Meanwhile, the rest of the industry is forecast to expand by 9.7% per annum, which is noticeably more attractive.

In light of this, it's alarming that Diamond Offshore Drilling's P/S sits above the majority of other companies.  Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price.  There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.  

What We Can Learn From Diamond Offshore Drilling'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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Diamond Offshore Drilling, this doesn't appear to be impacting the P/S in the slightest.  The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve.  At these price levels, investors should remain cautious, particularly if things don't improve.    

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

If these risks are making you reconsider your opinion on Diamond Offshore Drilling, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.