When you see that almost half of the companies in the Oil and Gas industry in China have price-to-sales ratios (or "P/S") below 1.4x, Geo-Jade Petroleum Corporation (SHSE:600759) looks to be giving off strong sell signals with its 4x 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.

How Has Geo-Jade Petroleum Performed Recently?

Revenue has risen at a steady rate over the last year for Geo-Jade Petroleum, which is generally not a bad outcome. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 4.6% last year. Pleasingly, revenue has also lifted 67% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 6.4% shows it's noticeably more attractive.

In light of this, it's understandable that Geo-Jade Petroleum's P/S sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What Does Geo-Jade Petroleum's P/S Mean For Investors?

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.

It's no surprise that Geo-Jade Petroleum can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. In the eyes of shareholders, the probability of a continued growth trajectory is great enough to prevent the P/S from pulling back. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Geo-Jade Petroleum (at least 1 which doesn't sit too well with us), and understanding them should be part of your investment process.

If you're unsure about the strength of Geo-Jade Petroleum's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.