You may think that with a price-to-sales (or "P/S") ratio of 1.3x Talos Energy Inc. (NYSE:TALO) is a stock worth checking out, seeing as almost half of all the Oil and Gas companies in the United States have P/S ratios greater than 1.9x and even P/S higher than 4x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Talos Energy's Recent Performance Look Like?

With its revenue growth in positive territory compared to the declining revenue of most other companies, Talos Energy has been doing quite well of late. It might be that many expect the strong revenue performance to degrade substantially, possibly more than the industry, which has repressed the P/S. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

How Is Talos Energy's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Talos Energy's to be considered reasonable.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Still, the latest three year period has seen an excellent 137% overall rise in revenue, in spite of its uninspiring short-term performance. Accordingly, shareholders will be pleased, but also have some questions to ponder about the last 12 months.

Looking ahead now, revenue is anticipated to climb by 7.2% per year during the coming three years according to the nine analysts following the company. That's shaping up to be materially higher than the 2.5% each year growth forecast for the broader industry.

With this in consideration, we find it intriguing that Talos Energy's P/S sits behind most of its industry peers. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

To us, it seems Talos Energy currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

Having said that, be aware Talos Energy is showing 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com