Why Investors Shouldn't Be Surprised By Pharmaniaga Berhad's (KLSE:PHARMA) Low P/S

When you see that almost half of the companies in the Healthcare industry in Malaysia have price-to-sales ratios (or "P/S") above 3.2x, Pharmaniaga Berhad (KLSE:PHARMA) looks to be giving off very strong buy signals with its 0.1x P/S ratio. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Pharmaniaga Berhad

How Pharmaniaga Berhad Has Been Performing

While the industry has experienced revenue growth lately, Pharmaniaga Berhad's revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Pharmaniaga Berhad.

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

In order to justify its P/S ratio, Pharmaniaga Berhad would need to produce anemic growth that's substantially trailing the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 3.0%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 25% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 2.0% as estimated by the sole analyst watching the company. That's not great when the rest of the industry is expected to grow by 6.0%.

With this information, we are not surprised that Pharmaniaga Berhad is trading at a P/S lower than the industry. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What Does Pharmaniaga Berhad's P/S Mean For Investors?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Pharmaniaga Berhad's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, Pharmaniaga Berhad's poor outlook justifies its low P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Pharmaniaga Berhad (1 is concerning!) that you need to be mindful of.

If you're unsure about the strength of Pharmaniaga 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.