Getting In Cheap On Tokai Rika Co., Ltd. (TSE:6995) Might Be Difficult

With a median price-to-sales (or "P/S") ratio of close to 0.3x in the Auto Components industry in Japan, you could be forgiven for feeling indifferent about Tokai Rika Co., Ltd.'s (TSE:6995) P/S ratio of 0.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Tokai Rika

How Has Tokai Rika Performed Recently?

With revenue growth that's superior to most other companies of late, Tokai Rika has been doing relatively well. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. 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 not quite in favour.

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

How Is Tokai Rika's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Tokai Rika's is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a terrific increase of 15%. The latest three year period has also seen an excellent 43% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 3.4% during the coming year according to the five analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 4.1%, which is not materially different.

With this in mind, it makes sense that Tokai Rika's P/S is closely matching its industry peers. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Final Word

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.

A Tokai Rika's 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. At this stage investors feel the potential for an improvement or deterioration in revenue isn't great enough to push P/S in a higher or lower direction. All things considered, if the P/S and revenue estimates contain no major shocks, then it's hard to see the share price moving strongly in either direction in the near future.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Tokai Rika (1 shouldn't be ignored) you should be aware of.

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.