What You Can Learn From Sumitomo Rubber Industries, Ltd.'s (TSE:5110) P/S

There wouldn't be many who think Sumitomo Rubber Industries, Ltd.'s (TSE:5110) price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S for the Auto Components industry in Japan is very similar. 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.

Check out our latest analysis for Sumitomo Rubber Industries

How Sumitomo Rubber Industries Has Been Performing

Sumitomo Rubber Industries could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sumitomo Rubber Industries.

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

In order to justify its P/S ratio, Sumitomo Rubber Industries would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.8% last year. This was backed up an excellent period prior to see revenue up by 35% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next three years should generate growth of 2.8% per annum as estimated by the ten analysts watching the company. With the industry predicted to deliver 3.7% growth per year, the company is positioned for a comparable revenue result.

With this information, we can see why Sumitomo Rubber Industries is trading at a fairly similar P/S to the industry. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

The Final Word

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.

A Sumitomo Rubber Industries' P/S seems about right to us given the knowledge that analysts are forecasting a revenue outlook that is similar to the Auto Components industry. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Sumitomo Rubber Industries (at least 1 which is concerning), and understanding them should be part of your investment process.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.