Revenues Not Telling The Story For Borneo Oil Berhad (KLSE:BORNOIL) After Shares Rise 100%

The Borneo Oil Berhad (KLSE:BORNOIL) share price has done very well over the last month, posting an excellent gain of 100%. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

After such a large jump in price, given close to half the companies operating in Malaysia's Hospitality industry have price-to-sales ratios (or "P/S") below 1.1x, you may consider Borneo Oil Berhad as a stock to potentially avoid with its 1.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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See our latest analysis for Borneo Oil Berhad

What Does Borneo Oil Berhad's P/S Mean For Shareholders?

It looks like revenue growth has deserted Borneo Oil Berhad recently, which is not something to boast about. One possibility is that the P/S is high because investors think the benign revenue growth will improve to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Borneo Oil Berhad's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Borneo Oil Berhad?

In order to justify its P/S ratio, Borneo Oil Berhad would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 16% overall from three years ago. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 9.1% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Borneo Oil Berhad's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very 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.

The Final Word

Borneo Oil Berhad shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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 examination of Borneo Oil Berhad revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Plus, you should also learn about these 5 warning signs we've spotted with Borneo Oil Berhad (including 3 which are 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.