Revenues Not Telling The Story For Nakamura Choukou Co., Ltd. (TSE:6166) After Shares Rise 45%

Nakamura Choukou Co., Ltd. (TSE:6166) shares have had a really impressive month, gaining 45% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 22% in the last twelve months.

Following the firm bounce in price, given close to half the companies operating in Japan's Machinery industry have price-to-sales ratios (or "P/S") below 0.8x, you may consider Nakamura Choukou as a stock to potentially avoid with its 2.1x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Nakamura Choukou

How Has Nakamura Choukou Performed Recently?

For example, consider that Nakamura Choukou's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Nakamura Choukou's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 27%. This means it has also seen a slide in revenue over the longer-term as revenue is down 37% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 4.6% shows it's an unpleasant look.

With this information, we find it concerning that Nakamura Choukou is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Nakamura Choukou shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

We've established that Nakamura Choukou currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You should always think about risks. Case in point, we've spotted 4 warning signs for Nakamura Choukou you should be aware of, and 2 of them can't be ignored.

If these risks are making you reconsider your opinion on Nakamura Choukou, 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