SFP Tech Holdings Berhad (KLSE:SFPTECH) May Have Run Too Fast Too Soon With Recent 56% Price Plummet

SFP Tech Holdings Berhad (KLSE:SFPTECH) shareholders that were waiting for something to happen have been dealt a blow with a 56% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 65% share price decline.

Even after such a large drop in price, when almost half of the companies in Malaysia's Machinery industry have price-to-sales ratios (or "P/S") below 1.3x, you may still consider SFP Tech Holdings Berhad as a stock not worth researching with its 4.2x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for SFP Tech Holdings Berhad

What Does SFP Tech Holdings Berhad's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, SFP Tech Holdings Berhad has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on SFP Tech Holdings Berhad.

Is There Enough Revenue Growth Forecasted For SFP Tech Holdings Berhad?

SFP Tech Holdings Berhad's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 38% last year. The latest three year period has also seen an excellent 237% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 0.08% each year during the coming three years according to the three analysts following the company. With the industry predicted to deliver 8.1% growth per year, the company is positioned for a weaker revenue result.

In light of this, it's alarming that SFP Tech Holdings Berhad's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

SFP Tech Holdings Berhad's shares may have suffered, but its P/S remains high. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for SFP Tech Holdings Berhad, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 3 warning signs for SFP Tech Holdings Berhad you should be aware of, and 1 of them is concerning.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.