Benign Growth For Tongtai Machine & Tool Co., Ltd. (TWSE:4526) Underpins Its Share Price - Simply Wall St News

When close to half the companies operating in the Machinery industry in Taiwan have price-to-sales ratios (or "P/S") above 2.2x, you may consider Tongtai Machine & Tool Co., Ltd. (TWSE:4526) as an attractive investment with its 1.4x 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 limited.

See our latest analysis for Tongtai Machine & Tool

For example, consider that Tongtai Machine & Tool's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on Tongtai Machine & Tool will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

There's an inherent assumption that a company should underperform the industry for P/S ratios like Tongtai Machine & Tool's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 19% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 24% in aggregate. 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 14% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that Tongtai Machine & Tool is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

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.

As we suspected, our examination of Tongtai Machine & Tool revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for Tongtai Machine & Tool that you need to take into consideration.

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.

Discover if Tongtai Machine & Tool might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.

Manufactures and sells machines worldwide.

Mediocre balance sheet and slightly overvalued.