There wouldn't be many who think RGB International Bhd.'s (KLSE:RGB) price-to-sales (or "P/S") ratio of 1.2x is worth a mention when the median P/S for the Hospitality industry in Malaysia is similar at about 1.6x. 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 RGB International Bhd
What Does RGB International Bhd's P/S Mean For Shareholders?
Recent times have been quite advantageous for RGB International Bhd as its revenue has been rising very briskly. It might be that many expect the strong revenue performance to wane, which has kept the share price, and thus the P/S ratio, from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction 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 RGB International Bhd'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 RGB International Bhd's to be considered reasonable.
If we review the last year of revenue growth, the company posted a terrific increase of 58%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 11% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.
In contrast to the company, the rest of the industry is expected to grow by 6.8% over the next year, which really puts the company's recent medium-term revenue decline into perspective.
With this in mind, we find it worrying that RGB International Bhd's P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. 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 RGB International Bhd's P/S?
Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
The fact that RGB International Bhd currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.