What Saudi Research and Media Group's (TADAWUL:4210) P/S Is Not Telling You
When close to half the companies in the Media industry in Saudi Arabia have price-to-sales ratios (or "P/S") below 2.7x, you may consider Saudi Research and Media Group (TADAWUL:4210) as a stock to potentially avoid with its 3.9x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.
Check out our latest analysis for Saudi Research and Media Group
What Does Saudi Research and Media Group's Recent Performance Look Like?
While the industry has experienced revenue growth lately, Saudi Research and Media Group's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Saudi Research and Media Group.What Are Revenue Growth Metrics Telling Us About The High P/S?
The only time you'd be truly comfortable seeing a P/S as high as Saudi Research and Media Group's is when the company's growth is on track to outshine the industry.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 17%. The last three years don't look nice either as the company has shrunk revenue by 23% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 5.3% each year over the next three years. With the industry predicted to deliver 6.6% growth per annum, the company is positioned for a comparable revenue result.
With this information, we find it interesting that Saudi Research and Media Group is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.
The Key Takeaway
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.
Given Saudi Research and Media Group's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.
Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Saudi Research and Media Group with six simple checks will allow you to discover any risks that could be an issue.
Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.