Investors Still Waiting For A Pull Back In Shima Seiki Mfg.,Ltd. (TSE:6222)

Shima Seiki Mfg.,Ltd.'s (TSE:6222) price-to-sales (or "P/S") ratio of 1.3x may not look like an appealing investment opportunity when you consider close to half the companies in the Machinery industry in Japan have P/S ratios below 0.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Shima Seiki Mfg.Ltd

How Has Shima Seiki Mfg.Ltd Performed Recently?

Recent revenue growth for Shima Seiki Mfg.Ltd has been in line with the industry. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated 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 Shima Seiki Mfg.Ltd.

How Is Shima Seiki Mfg.Ltd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Shima Seiki Mfg.Ltd's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a decent 5.6% gain to the company's revenues. The latest three year period has also seen an excellent 56% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 8.2% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 3.9%, which is noticeably less attractive.

With this information, we can see why Shima Seiki Mfg.Ltd is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Shima Seiki Mfg.Ltd's P/S

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look into Shima Seiki Mfg.Ltd shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Shima Seiki Mfg.Ltd with six simple checks on some of these key factors.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.