Kencana Agri Limited (SGX:BNE) shares have had a really impressive month, gaining 44% after a shaky period beforehand.    Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.  

Even after such a large jump in price, it would still be understandable if you think Kencana Agri is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.1x, considering almost half the companies in Singapore's Food industry have P/S ratios above 0.7x.   However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.  

SGX:BNE Price to Sales Ratio vs Industry May 30th 2024

What Does Kencana Agri's P/S Mean For Shareholders?

For example, consider that Kencana Agri's financial performance has been poor lately as its revenue has been in decline.   One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future.  However, if this doesn't eventuate then existing shareholders may 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 Kencana Agri's earnings, revenue and cash flow.  

What Are Revenue Growth Metrics Telling Us About The Low P/S?  

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

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line.   However, a few very strong years before that means that it was still able to grow revenue by an impressive 31% in total over the last three years.  So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.  

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 2.8% shows it's noticeably more attractive.

With this in mind, we find it intriguing that Kencana Agri's P/S isn't as high compared to that of its industry peers.  Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.  

What We Can Learn From Kencana Agri's P/S?

Despite Kencana Agri's share price climbing recently, its P/S still lags most other companies.      We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We're very surprised to see Kencana Agri currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast.  When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio.  It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.    

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Kencana Agri that you should be aware of.  

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.