Optimistic Investors Push E.A. Technique (M) Berhad (KLSE:EATECH) Shares Up 29% But Growth Is Lacking

E.A. Technique (M) Berhad (KLSE:EATECH) shareholders have had their patience rewarded with a 29% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 76%.

After such a large jump in price, given close to half the companies operating in Malaysia's Oil and Gas industry have price-to-sales ratios (or "P/S") below 0.6x, you may consider E.A. Technique (M) Berhad as a stock to potentially avoid with its 1.3x 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.

View our latest analysis for E.A. Technique (M) Berhad

How E.A. Technique (M) Berhad Has Been Performing

As an illustration, revenue has deteriorated at E.A. Technique (M) Berhad over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

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 E.A. Technique (M) Berhad's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

E.A. Technique (M) Berhad's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 4.2%. This means it has also seen a slide in revenue over the longer-term as revenue is down 55% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to shrink 1.9% in the next 12 months, the company's downward momentum is still inferior based on recent medium-term annualised revenue results.

In light of this, it's odd that E.A. Technique (M) Berhad's P/S sits above the majority of other companies. With revenue going quickly in reverse, it's not guaranteed that the P/S has found a floor yet. There's potential for the P/S to fall to lower levels if the company doesn't improve its top-line growth, which would be difficult to do with the current industry outlook.

What Does E.A. Technique (M) Berhad's P/S Mean For Investors?

E.A. Technique (M) Berhad shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

We've established that E.A. Technique (M) Berhad currently trades on a much higher than expected P/S since its recent three-year revenues are even worse than the forecasts for a struggling industry. Right now we aren't comfortable with the high P/S as this revenue performance is unlikely to support such positive sentiment for long. We're also cautious about the company's ability to stay its recent medium-term course and resist even greater pain to its business from the broader industry turmoil. This would place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 3 warning signs we've spotted with E.A. Technique (M) Berhad (including 1 which is concerning).

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).

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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.