When close to half the companies operating in the Oil and Gas industry in China have price-to-sales ratios (or "P/S") above 1.3x, you may consider Oriental Energy Co., Ltd. (SZSE:002221) as an attractive investment with its 0.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

How Oriental Energy Has Been Performing

With only a limited decrease in revenue compared to most other companies of late, Oriental Energy has been doing relatively well. One possibility is that the P/S ratio is low because investors think this relatively better revenue performance might be about to deteriorate significantly. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. In saying that, existing shareholders probably aren't pessimistic about the share price if the company's revenue continues outplaying the industry.

Is There Any Revenue Growth Forecasted For Oriental Energy?

The only time you'd be truly comfortable seeing a P/S as low as Oriental Energy's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 3.3% decrease to the company's top line. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Looking ahead now, revenue is anticipated to climb by 2.4% during the coming year according to the three analysts following the company. With the industry predicted to deliver 5.7% growth, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Oriental Energy's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Oriental Energy's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Oriental Energy has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If these risks are making you reconsider your opinion on Oriental Energy, 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.