TSR Capital Berhad's (KLSE:TSRCAP) Shares May Have Run Too Fast Too Soon

It's not a stretch to say that TSR Capital Berhad's (KLSE:TSRCAP) price-to-sales (or "P/S") ratio of 0.8x right now seems quite "middle-of-the-road" for companies in the Construction industry in Malaysia, where the median P/S ratio is around 1x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for TSR Capital Berhad

What Does TSR Capital Berhad's P/S Mean For Shareholders?

The revenue growth achieved at TSR Capital Berhad over the last year would be more than acceptable for most companies. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on TSR Capital Berhad will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for TSR Capital Berhad, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is TSR Capital Berhad's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like TSR Capital Berhad's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 15%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 33% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 13% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's somewhat alarming that TSR Capital Berhad's P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 TSR Capital Berhad's P/S?

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.

Our look at TSR Capital Berhad revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set 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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for TSR Capital Berhad (1 is a bit unpleasant) you should be aware of.

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.