Permaju Industries Berhad (KLSE:PERMAJU) Stock Rockets 38% As Investors Are Less Pessimistic Than Expected

Permaju Industries Berhad (KLSE:PERMAJU) shareholders would be excited to see that the share price has had a great month, posting a 38% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 10.0% isn't as impressive.

Since its price has surged higher, given close to half the companies operating in Malaysia's Specialty Retail industry have price-to-sales ratios (or "P/S") below 0.8x, you may consider Permaju Industries Berhad as a stock to potentially avoid with its 2.2x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Permaju Industries Berhad

What Does Permaju Industries Berhad's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Permaju Industries Berhad has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. 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 Permaju Industries 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 Permaju Industries Berhad's Revenue Growth Trending?

Permaju Industries Berhad's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered an exceptional 81% gain to the company's top line. Still, revenue has fallen 2.4% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 10% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Permaju Industries Berhad's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very 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 Bottom Line On Permaju Industries Berhad's P/S

Permaju Industries Berhad's P/S is on the rise since its shares have risen strongly. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Permaju Industries Berhad revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Plus, you should also learn about these 4 warning signs we've spotted with Permaju Industries Berhad (including 3 which are significant).

If you're unsure about the strength of Permaju Industries 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.