Risks To Shareholder Returns Are Elevated At These Prices For Zantat Holdings Berhad (KLSE:ZANTAT)

There wouldn't be many who think Zantat Holdings Berhad's (KLSE:ZANTAT) price-to-sales (or "P/S") ratio of 0.7x is worth a mention when the median P/S for the Chemicals industry in Malaysia is similar at about 1x. 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.

We've discovered 4 warning signs about Zantat Holdings Berhad. View them for free.

See our latest analysis for Zantat Holdings Berhad

What Does Zantat Holdings Berhad's P/S Mean For Shareholders?

For instance, Zantat Holdings Berhad's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is 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 Zantat Holdings Berhad's earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

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

Retrospectively, the last year delivered a frustrating 17% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 15% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 3.2% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's somewhat alarming that Zantat Holdings Berhad's P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

The fact that Zantat Holdings Berhad currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Zantat Holdings Berhad (2 shouldn't be ignored) you should be aware of.

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.