Some Confidence Is Lacking In Melati Ehsan Holdings Berhad's (KLSE:MELATI) P/S

There wouldn't be many who think Melati Ehsan Holdings Berhad's (KLSE:MELATI) price-to-sales (or "P/S") ratio of 0.7x is worth a mention when the median P/S for the Construction industry in Malaysia is similar at about 1.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Melati Ehsan Holdings Berhad

What Does Melati Ehsan Holdings Berhad's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Melati Ehsan Holdings Berhad has been doing very well. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on Melati Ehsan Holdings Berhad will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Melati Ehsan Holdings Berhad will help you shine a light on its historical performance.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Melati Ehsan Holdings Berhad would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company grew revenue by an impressive 41% last year. Still, revenue has fallen 49% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 19% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Melati Ehsan Holdings Berhad's P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Melati Ehsan Holdings Berhad's P/S?

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We find it unexpected that Melati Ehsan Holdings Berhad trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You need to take note of risks, for example - Melati Ehsan Holdings Berhad has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If these risks are making you reconsider your opinion on Melati Ehsan Holdings Berhad, 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.