Nitto Boseki Co., Ltd.'s (TSE:3110) Price In Tune With Revenues

When you see that almost half of the companies in the Building industry in Japan have price-to-sales ratios (or "P/S") below 0.5x, Nitto Boseki Co., Ltd. (TSE:3110) looks to be giving off some sell signals with its 2.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Nitto Boseki

What Does Nitto Boseki's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Nitto Boseki's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high 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.

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

In order to justify its P/S ratio, Nitto Boseki would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 4.3% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 8.5% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 16% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 3.5%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Nitto Boseki's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the 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. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 3 warning signs for Nitto Boseki that we have uncovered.

If you're unsure about the strength of Nitto Boseki's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.