Stock Analysis

Red Sea International Company (TADAWUL:4230) Stock Rockets 29% But Many Are Still Ignoring The Company

Published
SASE:4230

Despite an already strong run, Red Sea International Company (TADAWUL:4230) shares have been powering on, with a gain of 29% in the last thirty days. The last month tops off a massive increase of 192% in the last year.

In spite of the firm bounce in price, Red Sea International's price-to-sales (or "P/S") ratio of 0.7x might still make it look like a strong buy right now compared to the wider Real Estate industry in Saudi Arabia, where around half of the companies have P/S ratios above 5.9x and even P/S above 15x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Red Sea International

SASE:4230 Price to Sales Ratio vs Industry October 12th 2024

How Red Sea International Has Been Performing

Recent times have been quite advantageous for Red Sea International as its revenue has been rising very briskly. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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

How Is Red Sea International's Revenue Growth Trending?

In order to justify its P/S ratio, Red Sea International would need to produce anemic growth that's substantially trailing the industry.

If we review the last year of revenue growth, we see the company's revenues grew exponentially. 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.

This is in contrast to the rest of the industry, which is expected to grow by 32% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Red Sea International 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.

What We Can Learn From Red Sea International's P/S?

Red Sea International's recent share price jump still sees fails to bring its P/S alongside the industry median. 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.

Our examination of Red Sea International revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. 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.

It is also worth noting that we have found 3 warning signs for Red Sea International that you need to take into consideration.

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.