Investors Continue Waiting On Sidelines For Reach Energy Berhad (KLSE:REACH)

There wouldn't be many who think Reach Energy Berhad's (KLSE:REACH) price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S for the Oil and Gas industry in Malaysia is similar at about 0.6x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Reach Energy Berhad

How Has Reach Energy Berhad Performed Recently?

Revenue has risen firmly for Reach Energy Berhad recently, which is pleasing to see. 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. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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 Reach Energy Berhad's earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Reach Energy Berhad?

In order to justify its P/S ratio, Reach Energy Berhad would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 23%. The strong recent performance means it was also able to grow revenue by 162% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Weighing the recent medium-term upward revenue trajectory against the broader industry's one-year forecast for contraction of 0.1% shows it's a great look while it lasts.

With this information, we find it odd that Reach Energy Berhad is trading at a fairly similar P/S to the industry. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

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

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As mentioned previously, Reach Energy Berhad currently trades on a P/S on par with the wider industry, but this is lower than expected considering its recent three-year revenue growth is beating forecasts for a struggling industry. When we see a history of positive growth in a struggling industry, but only an average P/S, we assume potential risks are what might be placing pressure on the P/S ratio. Without the guidance of analysts, perhaps shareholders are feeling uncertain over whether the revenue performance can continue amidst a declining industry outlook. The fact that the company's relative performance has not provided a kick to the share price suggests that some investors are anticipating revenue instability.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Reach Energy Berhad (2 are a bit unpleasant) you should be aware of.

If these risks are making you reconsider your opinion on Reach Energy Berhad, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.