Not Many Are Piling Into Securemetric Berhad (KLSE:SMETRIC) Stock Yet As It Plummets 27%

Securemetric Berhad (KLSE:SMETRIC) shares have had a horrible month, losing 27% after a relatively good period beforehand. Still, a bad month hasn't completely ruined the past year with the stock gaining 32%, which is great even in a bull market.

Even after such a large drop in price, Securemetric Berhad's price-to-sales (or "P/S") ratio of 2x might still make it look like a strong buy right now compared to the wider Software industry in Malaysia, where around half of the companies have P/S ratios above 4.2x and even P/S above 7x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

View our latest analysis for Securemetric Berhad

How Has Securemetric Berhad Performed Recently?

With revenue growth that's exceedingly strong of late, Securemetric Berhad has been doing very well. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. 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 out of 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 Securemetric Berhad's earnings, revenue and cash flow.

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

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

If we review the last year of revenue growth, the company posted a terrific increase of 61%. The latest three year period has also seen an excellent 109% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 21% shows it's noticeably more attractive.

With this information, we find it odd that Securemetric Berhad is trading at a P/S lower than the industry. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

Having almost fallen off a cliff, Securemetric Berhad's share price has pulled its P/S way down as well. 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.

We're very surprised to see Securemetric 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. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

You should always think about risks. Case in point, we've spotted 4 warning signs for Securemetric Berhad you should be aware of, and 1 of them is a bit unpleasant.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.