Why Investors Shouldn't Be Surprised By Takaful Emarat - Insurance (PSC)'s (DFM:TAKAFUL-EM) Low P/S

Takaful Emarat - Insurance (PSC)'s (DFM:TAKAFUL-EM) price-to-sales (or "P/S") ratio of 0.4x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Insurance industry in the United Arab Emirates have P/S ratios greater than 1.3x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Takaful Emarat - Insurance (PSC)

What Does Takaful Emarat - Insurance (PSC)'s P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Takaful Emarat - Insurance (PSC) over the last year, which is not ideal at all. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. Those who are bullish on Takaful Emarat - Insurance (PSC) will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Takaful Emarat - Insurance (PSC)'s earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

Takaful Emarat - Insurance (PSC)'s P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a frustrating 48% decrease to the company's top line. As a result, revenue from three years ago have also fallen 51% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to shrink 13% in the next 12 months, the company's downward momentum is still inferior based on recent medium-term annualised revenue results.

With this in consideration, it's no surprise that Takaful Emarat - Insurance (PSC)'s P/S falls short of its industry peers. However, when revenue shrink rapidly P/S often shrinks too, which could set up shareholders for future disappointment regardless. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth, which would be difficult to do with the current industry outlook.

What Does Takaful Emarat - Insurance (PSC)'s P/S Mean For Investors?

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.

As we suspected, our examination of Takaful Emarat - Insurance (PSC) revealed its sharp three-year contraction in revenue is contributing to its low P/S, given the industry is set to shrink less severely. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Although, we would be concerned whether the company can even maintain its medium-term level of performance under these tough industry conditions. For now though, it's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 5 warning signs for Takaful Emarat - Insurance (PSC) (2 don't sit too well with us!) that we have uncovered.

If these risks are making you reconsider your opinion on Takaful Emarat - Insurance (PSC), 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.