Lacklustre Performance Is Driving Nanjing Toua Hardware and Tools Co., Ltd.'s (SZSE:301125) 35% Price Drop

To the annoyance of some shareholders, Nanjing Toua Hardware and Tools Co., Ltd. (SZSE:301125) shares are down a considerable 35% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 55% share price decline.

Since its price has dipped substantially, Nanjing Toua Hardware and Tools' price-to-sales (or "P/S") ratio of 1.9x might make it look like a buy right now compared to the Machinery industry in China, where around half of the companies have P/S ratios above 2.5x and even P/S above 5x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Nanjing Toua Hardware and Tools

How Has Nanjing Toua Hardware and Tools Performed Recently?

The revenue growth achieved at Nanjing Toua Hardware and Tools over the last year would be more than acceptable for most companies. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. Those who are bullish on Nanjing Toua Hardware and Tools will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for Nanjing Toua Hardware and Tools, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Nanjing Toua Hardware and Tools' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Nanjing Toua Hardware and Tools' is when the company's growth is on track to lag the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 15%. The solid recent performance means it was also able to grow revenue by 27% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Nanjing Toua Hardware and Tools' P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Nanjing Toua Hardware and Tools' P/S?

Nanjing Toua Hardware and Tools' recently weak share price has pulled its P/S back below other Machinery companies. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Nanjing Toua Hardware and Tools revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. 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 experience a reversal of fortunes anytime soon.

You need to take note of risks, for example - Nanjing Toua Hardware and Tools has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.

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