Arrow Exploration Corp. (CVE:AXL) Soars 28% But It’s A Story Of Risk Vs Reward

Despite an already strong run, Arrow Exploration Corp. (CVE:AXL) shares have been powering on, with a gain of 28% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 14% over that time.

Even after such a large jump in price, Arrow Exploration may still look like a strong buying opportunity at present with its price-to-sales (or “P/S”) ratio of 0.9x, considering almost half of all companies in the Oil and Gas industry in Canada have P/S ratios greater than 2.9x and even P/S higher than 8x aren’t out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it’s justified.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Check out our latest analysis for Arrow Exploration

What Does Arrow Exploration’s P/S Mean For Shareholders?

Arrow Exploration certainly has been doing a good job lately as it’s been growing revenue more than most other companies. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Arrow Exploration will help you uncover what’s on the horizon.

How Is Arrow Exploration’s Revenue Growth Trending?

There’s an inherent assumption that a company should far underperform the industry for P/S ratios like Arrow Exploration’s to be considered reasonable.

Retrospectively, the last year delivered an exceptional 20% 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. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 4.2% each year as estimated by the three analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 4.5% per annum, which is not materially different.

In light of this, it’s peculiar that Arrow Exploration’s P/S sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

What Does Arrow Exploration’s P/S Mean For Investors?

Even after such a strong price move, Arrow Exploration’s P/S still trails the rest of the industry. While the price-to-sales ratio shouldn’t be the defining factor in whether you buy a stock or not, it’s quite a capable barometer of revenue expectations.

We’ve seen that Arrow Exploration currently trades on a lower than expected P/S since its forecast growth is in line with the wider industry. Despite average revenue growth estimates, there could be some unobserved threats keeping the P/S low. Perhaps investors are concerned that the company could underperform against the forecasts over the near term.

And what about other risks? Every company has them, and we’ve spotted 2 warning signs for Arrow Exploration (of which 1 is a bit concerning!) you should know about.

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

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.