Hiap Seng Industries Limited (SGX:1L2) shareholders are no doubt pleased to see that the share price has bounced 50% in the last month, although it is still struggling to make up recently lost ground.    While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.  

In spite of the firm bounce in price, it would still be understandable if you think Hiap Seng Industries is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.4x, considering almost half the companies in Singapore's Energy Services industry have P/S ratios above 1x.   However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.  

SGX:1L2 Price to Sales Ratio vs Industry June 4th 2024

How Hiap Seng Industries Has Been Performing

With revenue growth that's exceedingly strong of late, Hiap Seng Industries has been doing very well.   It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio.  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 out of favour.    

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 Hiap Seng Industries' earnings, revenue and cash flow.  

Do Revenue Forecasts Match The Low P/S Ratio?  

In order to justify its P/S ratio, Hiap Seng Industries would need to produce sluggish growth that's trailing the industry.  

Taking a look back first, we see that the company grew revenue by an impressive 34% last year.    Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 15% overall.  So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.  

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 14% shows it's an unpleasant look.

With this information, we are not surprised that Hiap Seng Industries is trading at a P/S lower than the industry.  However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment.  Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.  

The Key Takeaway

The latest share price surge wasn't enough to lift Hiap Seng Industries' P/S close to the industry median.      Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Hiap Seng Industries revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow.  At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio.  If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.    

Having said that, be aware  Hiap Seng Industries is showing 2 warning signs in our investment analysis, you should know about.  

If you're unsure about the strength of Hiap Seng Industries' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.