EA Holdings Berhad (KLSE:EAH) Might Not Be As Mispriced As It Looks After Plunging 50%

EA Holdings Berhad (KLSE:EAH) shareholders that were waiting for something to happen have been dealt a blow with a 50% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 67% share price decline.

After such a large drop in price, EA Holdings Berhad may be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.5x, considering almost half of all companies in the IT industry in Malaysia have P/S ratios greater than 1.1x and even P/S higher than 4x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for EA Holdings Berhad

How EA Holdings Berhad Has Been Performing

Revenue has risen firmly for EA Holdings Berhad recently, which is pleasing to see. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. Those who are bullish on EA Holdings Berhad will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on EA Holdings Berhad will help you shine a light on its historical performance.

Is There Any Revenue Growth Forecasted For EA Holdings Berhad?

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

Retrospectively, the last year delivered an exceptional 29% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 91% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

When compared to the industry's one-year growth forecast of 10%, the most recent medium-term revenue trajectory is noticeably more alluring

In light of this, it's peculiar that EA Holdings Berhad's P/S sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

EA Holdings Berhad's recently weak share price has pulled its P/S back below other IT companies. 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.

We're very surprised to see EA Holdings Berhad currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to perceive a likelihood of revenue fluctuations in the future.

Plus, you should also learn about these 2 warning signs we've spotted with EA Holdings Berhad (including 1 which can't be ignored).

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.