There's No Escaping Tan Chong Motor Holdings Berhad's (KLSE:TCHONG) Muted Revenues Despite A 64% Share Price Rise

Tan Chong Motor Holdings Berhad (KLSE:TCHONG) shares have continued their recent momentum with a 64% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 9.0% over the last year.

Even after such a large jump in price, when close to half the companies operating in Malaysia's Auto industry have price-to-sales ratios (or "P/S") above 1x, you may still consider Tan Chong Motor Holdings Berhad as an enticing stock to check out with its 0.2x 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.

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Check out our latest analysis for Tan Chong Motor Holdings Berhad

What Does Tan Chong Motor Holdings Berhad's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Tan Chong Motor Holdings Berhad's revenue has gone into reverse gear, which is not great. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If you still 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.

Keen to find out how analysts think Tan Chong Motor Holdings Berhad's future stacks up against the industry? In that case, our free report is a great place to start.

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

There's an inherent assumption that a company should underperform the industry for P/S ratios like Tan Chong Motor Holdings Berhad's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 16%. The last three years don't look nice either as the company has shrunk revenue by 24% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to slump, contracting by 2.6% during the coming year according to the five analysts following the company. Meanwhile, the broader industry is forecast to expand by 13%, which paints a poor picture.

In light of this, it's understandable that Tan Chong Motor Holdings Berhad's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Tan Chong Motor Holdings Berhad's P/S

Tan Chong Motor Holdings Berhad's stock price has surged recently, but its but its P/S still remains modest. 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.

It's clear to see that Tan Chong Motor Holdings Berhad maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Tan Chong Motor Holdings Berhad (1 can't be ignored!) that you need to be mindful of.

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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.