Subdued Growth No Barrier To UWC Berhad (KLSE:UWC) With Shares Advancing 30%

UWC Berhad (KLSE:UWC) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 12% in the last twelve months.

Following the firm bounce in price, you could be forgiven for thinking UWC Berhad is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.8x, considering almost half the companies in Malaysia's Machinery industry have P/S ratios below 1.2x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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View our latest analysis for UWC Berhad

How Has UWC Berhad Performed Recently?

Recent times have been advantageous for UWC Berhad as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 66% gain to the company's top line. Revenue has also lifted 15% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Turning to the outlook, the next year should generate growth of 19% as estimated by the three analysts watching the company. With the industry predicted to deliver 21% growth , the company is positioned for a comparable revenue result.

With this information, we find it interesting that UWC Berhad is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From UWC Berhad's P/S?

The strong share price surge has lead to UWC Berhad's P/S soaring as well. 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.

Analysts are forecasting UWC Berhad's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. A positive change is needed in order to justify the current price-to-sales ratio.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with UWC Berhad (at least 1 which can't be ignored), and understanding these should be part of your investment process.

If you're unsure about the strength of UWC Berhad's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.