Stock Analysis

Sunmoon Food Company Limited's (SGX:AAJ) Shares Leap 35% Yet They're Still Not Telling The Full Story

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Sunmoon Food Company Limited (SGX:AAJ) shares have had a really impressive month, gaining 35% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 9.5% isn't as attractive.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Sunmoon Food's P/S ratio of 0.6x, since the median price-to-sales (or "P/S") ratio for the Consumer Retailing industry in Singapore is also close to 0.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Sunmoon Food

SGX:AAJ Price to Sales Ratio vs Industry December 7th 2023

How Sunmoon Food Has Been Performing

For instance, Sunmoon Food's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 Sunmoon Food's earnings, revenue and cash flow.

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

There's an inherent assumption that a company should be matching the industry for P/S ratios like Sunmoon Food's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 21%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 46% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 11% shows it's noticeably more attractive.

In light of this, it's curious that Sunmoon Food's P/S sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

What Does Sunmoon Food's P/S Mean For Investors?

Its shares have lifted substantially and now Sunmoon Food's P/S is back within range of the industry median. 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've established that Sunmoon Food currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Sunmoon Food (1 is concerning) you should be aware of.

If you're unsure about the strength of Sunmoon Food's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Valuation is complex, but we're helping make it simple.

Find out whether Sunmoon Food is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.