Unpleasant Surprises Could Be In Store For Nakamura Choukou Co., Ltd.'s (TSE:6166) Shares

When close to half the companies in the Machinery industry in Japan have price-to-sales ratios (or "P/S") below 0.6x, you may consider Nakamura Choukou Co., Ltd. (TSE:6166) as a stock to potentially avoid with its 1.3x P/S ratio. 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.

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Check out our latest analysis for Nakamura Choukou

What Does Nakamura Choukou's P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Nakamura Choukou, which is generally not a bad outcome. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Nakamura Choukou will help you shine a light on its historical performance.

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 Nakamura Choukou's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 5.7%. However, this wasn't enough as the latest three year period has seen an unpleasant 38% overall drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 4.6% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Nakamura Choukou's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

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.

Our examination of Nakamura Choukou revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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 3 warning signs for Nakamura Choukou you should be aware of.

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.