Subdued Growth No Barrier To Toyo Engineering Corporation (TSE:6330) With Shares Advancing 84%

Toyo Engineering Corporation (TSE:6330) shares have continued their recent momentum with a 84% gain in the last month alone. The annual gain comes to 168% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, there still wouldn't be many who think Toyo Engineering's price-to-sales (or "P/S") ratio of 0.4x is worth a mention when the median P/S in Japan's Construction industry is similar at about 0.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for Toyo Engineering

What Does Toyo Engineering's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Toyo Engineering's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Some Revenue Growth Forecasted For Toyo Engineering?

In order to justify its P/S ratio, Toyo Engineering would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 1.6% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 36% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 20% as estimated by the two analysts watching the company. That's not great when the rest of the industry is expected to grow by 1.3%.

With this in consideration, we think it doesn't make sense that Toyo Engineering's P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

The Final Word

Its shares have lifted substantially and now Toyo Engineering's P/S is back within range of the industry median. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It appears that Toyo Engineering currently trades on a higher than expected P/S for a company whose revenues are forecast to decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

Before you settle on your opinion, we've discovered 3 warning signs for Toyo Engineering (1 shouldn't be ignored!) that you should be aware of.

If these risks are making you reconsider your opinion on Toyo Engineering, 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.