Improved Revenues Required Before Sinmah Capital Berhad (KLSE:SMCAP) Stock's 26% Jump Looks Justified

Sinmah Capital Berhad (KLSE:SMCAP) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Unfortunately, despite the strong performance over the last month, the full year gain of 9.1% isn't as attractive.

Although its price has surged higher, given about half the companies operating in Malaysia's Food industry have price-to-sales ratios (or "P/S") above 1.2x, you may still consider Sinmah Capital Berhad as an attractive investment with its 0.6x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Sinmah Capital Berhad

How Has Sinmah Capital Berhad Performed Recently?

For example, consider that Sinmah Capital Berhad's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. 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 out of favour.

Although there are no analyst estimates available for Sinmah Capital Berhad, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Sinmah Capital Berhad's Revenue Growth Trending?

In order to justify its P/S ratio, Sinmah Capital Berhad would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 45% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 43% in aggregate. 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 5.0% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's understandable that Sinmah Capital Berhad's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

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

Sinmah Capital Berhad's stock price has surged recently, but its but its P/S still remains modest. 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.

As we suspected, our examination of Sinmah Capital Berhad revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Sinmah Capital Berhad, and understanding these should be part of your investment process.

If you're unsure about the strength of Sinmah Capital 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.