It's not a stretch to say that Far East Group Limited's (Catalist:5TJ) price-to-sales (or "P/S") ratio of 0.1x right now seems quite "middle-of-the-road" for companies in the Trade Distributors industry in Singapore, where the median P/S ratio is around 0.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
See our latest analysis for Far East Group
What Does Far East Group's Recent Performance Look Like?
The revenue growth achieved at Far East 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 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 Far East Group will help you shine a light on its historical performance.
Is There Some Revenue Growth Forecasted For Far East Group?
In order to justify its P/S ratio, Far East Group would need to produce growth that's similar to the industry.
If we review the last year of revenue growth, the company posted a terrific increase of 25%. The latest three year period has also seen an excellent 48% 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.
Weighing the recent medium-term upward revenue trajectory against the broader industry's one-year forecast for contraction of 0.4% shows it's a great look while it lasts.
With this in mind, we find it intriguing that Far East Group's P/S matches its industry peers. It looks like most investors are not convinced the company can maintain its recent positive growth rate in the face of a shrinking broader industry.
What We Can Learn From Far East Group's P/S?
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.
Our examination of Far East Group revealed its growing revenue over the medium-term hasn't helped elevate its P/S above that of the industry, which is surprising given the industry is set to shrink. There could be some unobserved threats to revenue preventing the P/S ratio from outpacing the industry much like its revenue performance. Perhaps there is some hesitation about the company's ability to stay its recent course and swim against the current of the broader industry turmoil. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.