Optimistic Investors Push Hiap Seng Industries Limited (SGX:1L2) Shares Up 67% But Growth Is Lacking

Hiap Seng Industries Limited (SGX:1L2) shares have had a really impressive month, gaining 67% after a shaky period beforehand. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

In spite of the firm bounce in price, it's still not a stretch to say that Hiap Seng Industries' price-to-sales (or "P/S") ratio of 0.7x right now seems quite "middle-of-the-road" compared to the Energy Services industry in Singapore, where the median P/S ratio is around 0.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Hiap Seng Industries

How Has Hiap Seng Industries Performed Recently?

With revenue growth that's exceedingly strong of late, Hiap Seng Industries has been doing very well. 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.

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

Is There Some Revenue Growth Forecasted For Hiap Seng Industries?

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

Retrospectively, the last year delivered an exceptional 34% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 15% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 14% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's somewhat alarming that Hiap Seng Industries' P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Hiap Seng Industries' P/S?

Its shares have lifted substantially and now Hiap Seng Industries' P/S is back within range of the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look at Hiap Seng Industries revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Hiap Seng Industries (of which 1 is a bit unpleasant!) you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.