Revenues Not Telling The Story For Southern Packaging Group Limited (SGX:BQP) After Shares Rise 87%

Southern Packaging Group Limited (SGX:BQP) shares have had a really impressive month, gaining 87% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 45%.

In spite of the firm bounce in price, there still wouldn't be many who think Southern Packaging Group's price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S in Singapore's Packaging industry is similar at about 0.8x. 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.

View our latest analysis for Southern Packaging Group

What Does Southern Packaging Group's P/S Mean For Shareholders?

The revenue growth achieved at Southern Packaging Group over the last year would be more than acceptable for most companies. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic 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 Southern Packaging Group will help you shine a light on its historical performance.

Do Revenue Forecasts Match The P/S Ratio?

Southern Packaging Group's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 15%. The solid recent performance means it was also able to grow revenue by 17% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 20% shows it's noticeably less attractive.

With this information, we find it interesting that Southern Packaging Group is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. 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

Southern Packaging Group appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

We've established that Southern Packaging Group's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. 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 the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Southern Packaging Group (at least 3 which don't sit too well with us), and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.