Nanjing Toua Hardware and Tools Co., Ltd. (SZSE:301125) Looks Inexpensive After Falling 35% But Perhaps Not Attractive Enough

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.

After such a large drop in price, 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.

Check out our latest analysis for Nanjing Toua Hardware and Tools

What Does Nanjing Toua Hardware and Tools' P/S Mean For Shareholders?

Revenue has risen firmly for Nanjing Toua Hardware and Tools recently, which is pleasing to see. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. 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.

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.

Do Revenue Forecasts Match The Low P/S Ratio?

Nanjing Toua Hardware and Tools' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a decent 15% gain to the company's revenues. Revenue has also lifted 27% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 23% shows it's noticeably less attractive.

With this information, we can see why Nanjing Toua Hardware and Tools is trading at a P/S lower than the industry. 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. 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 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Nanjing Toua Hardware and Tools is showing 2 warning signs in our investment analysis, and 1 of those is concerning.

If these risks are making you reconsider your opinion on Nanjing Toua Hardware and Tools, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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