Nitto Boseki Co., Ltd. (TSE:3110) Shares Slammed 27% But Getting In Cheap Might Be Difficult Regardless

Nitto Boseki Co., Ltd. (TSE:3110) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 13% share price drop.

In spite of the heavy fall in price, you could still be forgiven for thinking Nitto Boseki is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.7x, considering almost half the companies in Japan's Building industry have P/S ratios below 0.5x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Nitto Boseki

What Does Nitto Boseki's Recent Performance Look Like?

Recent times have been advantageous for Nitto Boseki as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Nitto Boseki's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 23%. Revenue has also lifted 29% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 9.3% over the next year. That's shaping up to be materially higher than the 3.6% growth forecast for the broader industry.

With this information, we can see why Nitto Boseki is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Despite the recent share price weakness, Nitto Boseki's P/S remains higher than most other companies in the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Nitto Boseki maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Building industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about this 1 warning sign we've spotted with Nitto Boseki.

If these risks are making you reconsider your opinion on Nitto Boseki, 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.