It's A Story Of Risk Vs Reward With Malaysia Marine and Heavy Engineering Holdings Berhad (KLSE:MHB)

When close to half the companies operating in the Energy Services industry in Malaysia have price-to-sales ratios (or "P/S") above 1x, you may consider Malaysia Marine and Heavy Engineering Holdings Berhad (KLSE:MHB) as an attractive investment with its 0.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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View our latest analysis for Malaysia Marine and Heavy Engineering Holdings Berhad

How Malaysia Marine and Heavy Engineering Holdings Berhad Has Been Performing

Recent times haven't been great for Malaysia Marine and Heavy Engineering Holdings Berhad as its revenue has been falling quicker than most other companies. Perhaps the market isn't expecting future revenue performance to improve, which has kept the P/S suppressed. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Malaysia Marine and Heavy Engineering Holdings Berhad will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Malaysia Marine and Heavy Engineering Holdings Berhad's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 28% decrease to the company's top line. Even so, admirably revenue has lifted 59% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Shifting to the future, estimates from the five analysts covering the company suggest revenue growth will show minor resilience over the next year growing only by 0.9%. Meanwhile, the broader industry is forecast to contract by 3.4%, which would indicate the company is doing better than the majority of its peers.

With this information, we find it very odd that Malaysia Marine and Heavy Engineering Holdings Berhad is trading at a P/S lower than the industry. Apparently some shareholders are doubtful of the contrarian forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Malaysia Marine and Heavy Engineering Holdings Berhad currently trades on a much lower than expected P/S since its growth forecasts are potentially beating a struggling industry. There could be some major unobserved threats to revenue preventing the P/S ratio from matching the positive outlook. Perhaps there is some hesitation about the company's ability to keep swimming against the current of the broader industry turmoil. It appears many are indeed anticipating revenue instability, because the company's current prospects should normally provide a boost to the share price.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Malaysia Marine and Heavy Engineering Holdings Berhad with six simple checks on some of these key factors.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.