Stock Analysis

Ahmad Zaki Resources Berhad's (KLSE:AZRB) Shares Bounce 26% But Its Business Still Trails The Industry

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Ahmad Zaki Resources Berhad (KLSE:AZRB) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 50% in the last year.

Even after such a large jump in price, Ahmad Zaki Resources Berhad's price-to-sales (or "P/S") ratio of 0.4x might still make it look like a buy right now compared to the Construction industry in Malaysia, where around half of the companies have P/S ratios above 0.9x and even P/S above 3x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Ahmad Zaki Resources Berhad

KLSE:AZRB Price to Sales Ratio vs Industry January 3rd 2024

How Ahmad Zaki Resources Berhad Has Been Performing

As an illustration, revenue has deteriorated at Ahmad Zaki Resources Berhad over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. Those who are bullish on Ahmad Zaki Resources Berhad 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 Ahmad Zaki Resources Berhad's earnings, revenue and cash flow.

How Is Ahmad Zaki Resources Berhad's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Ahmad Zaki Resources Berhad's is when the company's growth is on track to lag the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 31%. As a result, revenue from three years ago have also fallen 54% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 18% shows it's an unpleasant look.

In light of this, it's understandable that Ahmad Zaki Resources Berhad's P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Bottom Line On Ahmad Zaki Resources Berhad's P/S

Despite Ahmad Zaki Resources Berhad's share price climbing recently, its P/S still lags most other companies. 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.

As we suspected, our examination of Ahmad Zaki Resources Berhad revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Ahmad Zaki Resources Berhad (at least 1 which can't be ignored), and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Valuation is complex, but we're helping make it simple.

Find out whether Ahmad Zaki Resources Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.