Hoe Leong Corporation Ltd. (SGX:H20) shares have had a horrible month, losing 67% after a relatively good period beforehand.    For any long-term shareholders, the last month ends a year to forget by locking in a 50% share price decline.  

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Hoe Leong's P/S ratio of 0.4x, since the median price-to-sales (or "P/S") ratio for the Machinery industry in Singapore is also close to 0.5x.  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.    

View our latest analysis for Hoe Leong

SGX:H20 Price to Sales Ratio vs Industry December 18th 2023

How Has Hoe Leong Performed Recently?

For example, consider that Hoe Leong'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 you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in 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 Hoe Leong's earnings, revenue and cash flow.  

How Is Hoe Leong's Revenue Growth Trending?  

There's an inherent assumption that a company should be matching the industry for P/S ratios like Hoe Leong's to be considered reasonable.  

Retrospectively, the last year delivered a frustrating 12% decrease to the company's top line.   This means it has also seen a slide in revenue over the longer-term as revenue is down 4.5% 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.  

In contrast to the company, the rest of the industry is expected to grow by 36% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's somewhat alarming that Hoe Leong's P/S sits in line with the majority of other companies.  It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects.  Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.  

The Bottom Line On Hoe Leong's P/S

Hoe Leong's plummeting stock price has brought its P/S back to a similar region as the rest of the industry.      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.

We find it unexpected that Hoe Leong trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow.  When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower.  Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.    

We don't want to rain on the parade too much, but we did also find 5 warning signs for Hoe Leong (1 is potentially serious!) that you need to be mindful of.  

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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