The Price Is Right For Tanco Holdings Berhad (KLSE:TANCO) Even After Diving 38%

Tanco Holdings Berhad (KLSE:TANCO) shareholders that were waiting for something to happen have been dealt a blow with a 38% share price drop in the last month. Indeed, the recent drop has reduced its annual gain to a relatively sedate 2.8% over the last twelve months.

In spite of the heavy fall in price, you could still be forgiven for thinking Tanco Holdings Berhad is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.5x, considering almost half the companies in Malaysia's Real Estate industry have P/S ratios below 1.6x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Tanco Holdings Berhad

How Has Tanco Holdings Berhad Performed Recently?

Tanco Holdings Berhad certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Tanco Holdings Berhad's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 183% gain to the company's top line. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 9.5% shows it's noticeably more attractive.

With this information, we can see why Tanco Holdings Berhad is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From Tanco Holdings Berhad's P/S?

Tanco Holdings Berhad's shares may have suffered, but its P/S remains high. 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 Tanco Holdings Berhad revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. In the eyes of shareholders, the probability of a continued growth trajectory is great enough to prevent the P/S from pulling back. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Tanco Holdings Berhad you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.