Tanco Holdings Berhad's (KLSE:TANCO) Shares Climb 26% But Its Business Is Yet to Catch Up

The Tanco Holdings Berhad (KLSE:TANCO) share price has done very well over the last month, posting an excellent gain of 26%. The annual gain comes to 147% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, you could be forgiven for thinking Tanco Holdings Berhad is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 17x, considering almost half the companies in Malaysia's Real Estate industry have P/S ratios below 1.7x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Tanco Holdings Berhad

How Has Tanco Holdings Berhad Performed Recently?

With revenue growth that's superior to most other companies of late, Tanco Holdings Berhad has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Tanco Holdings Berhad's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company grew revenue by an impressive 85% last year. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Shifting to the future, estimates from the only analyst covering the company suggest revenue growth is heading into negative territory, declining 15% over the next year. With the industry predicted to deliver 10% growth, that's a disappointing outcome.

With this information, we find it concerning that Tanco Holdings Berhad is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh heavily on the share price eventually.

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

Shares in Tanco Holdings Berhad have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

Our examination of Tanco Holdings Berhad's analyst forecasts revealed that its shrinking revenue outlook isn't drawing down its high P/S anywhere near as much as we would have predicted. In cases like this where we see revenue decline on the horizon, we suspect the share price is at risk of following suit, bringing back the high P/S into the realms of suitability. Unless these conditions improve markedly, it'll be a challenging time for shareholders.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Tanco Holdings Berhad that you need to be mindful of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.