With a median price-to-sales (or "P/S") ratio of close to 0.6x in the Oil and Gas industry in Malaysia, you could be forgiven for feeling indifferent about E.A. Technique (M) Berhad's (KLSE:EATECH) P/S ratio of 0.7x. 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.
Check out our latest analysis for E.A. Technique (M) Berhad
How E.A. Technique (M) Berhad Has Been Performing
For example, consider that E.A. Technique (M) Berhad's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.
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Do Revenue Forecasts Match The P/S Ratio?
In order to justify its P/S ratio, E.A. Technique (M) Berhad would need to produce growth that's similar to the industry.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 2.0%. This means it has also seen a slide in revenue over the longer-term as revenue is down 46% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Comparing that to the industry, which is predicted to shrink 11% in the next 12 months, the company's downward momentum is still inferior based on recent medium-term annualised revenue results.
In light of this, it's somewhat peculiar that E.A. Technique (M) Berhad's P/S sits in line with the majority of other companies. In general, when revenue shrink rapidly the P/S often shrinks too, which could set up shareholders for future disappointment. There's potential for the P/S to fall to lower levels if the company doesn't improve its top-line growth, which would be difficult to do with the current industry outlook.
The Final Word
Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.
Our examination of E.A. Technique (M) Berhad revealed its sharp three-year contraction in revenue isn't impacting its P/S as much as we would have predicted, given the industry is set to shrink less severely. When we see below average revenue, we suspect the share price is at risk of declining, sending the moderate P/S lower. In addition, we would be concerned whether the company can even maintain its medium-term level of performance under these tough industry conditions. This would place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.