Sitio Royalties Corp.'s (NYSE:STR) price-to-sales (or "P/S") ratio of 3.2x may not look like an appealing investment opportunity when you consider close to half the companies in the Oil and Gas industry in the United States have P/S ratios below 1.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Sitio Royalties

How Has Sitio Royalties Performed Recently?

With its revenue growth in positive territory compared to the declining revenue of most other companies, Sitio Royalties has been doing quite well of late. Perhaps the market is expecting the company's future revenue growth to buck the trend of the industry, contributing to a higher P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

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

Retrospectively, the last year delivered an exceptional 70% gain to the company's top line. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 20% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 2.2%, which is noticeably less attractive.

In light of this, it's understandable that Sitio Royalties' P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

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 established that Sitio Royalties maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Oil and Gas industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Sitio Royalties (1 is potentially serious!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Sitio Royalties, 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.