Edaran Berhad's (KLSE:EDARAN) 66% Price Boost Is Out Of Tune With Revenues

Edaran Berhad (KLSE:EDARAN) shares have continued their recent momentum with a 66% gain in the last month alone. The last month tops off a massive increase of 120% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that Edaran Berhad's price-to-sales (or "P/S") ratio of 0.9x right now seems quite "middle-of-the-road" compared to the IT industry in Malaysia, where the median P/S ratio is around 1.3x. 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.

See our latest analysis for Edaran Berhad

How Has Edaran Berhad Performed Recently?

Recent times have been quite advantageous for Edaran Berhad as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to taper off, which has kept the P/S from rising. If you like the company, you'd be hoping this isn't 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 Edaran Berhad's earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Edaran Berhad?

The only time you'd be comfortable seeing a P/S like Edaran Berhad's is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a terrific increase of 57%. The strong recent performance means it was also able to grow revenue by 53% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 22% shows it's noticeably less attractive.

With this information, we find it interesting that Edaran Berhad is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

Its shares have lifted substantially and now Edaran Berhad's P/S is back within range of the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Edaran Berhad revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Edaran Berhad (1 is potentially serious!) that you should be aware of before investing here.

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.