Hoden Seimitsu Kako Kenkyusho Co., Ltd. (TSE:6469) Investors Are Less Pessimistic Than Expected

When close to half the companies in the Machinery industry in Japan have price-to-sales ratios (or "P/S") below 0.7x, you may consider Hoden Seimitsu Kako Kenkyusho Co., Ltd. (TSE:6469) as a stock to potentially avoid with its 1.3x 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.

View our latest analysis for Hoden Seimitsu Kako Kenkyusho

What Does Hoden Seimitsu Kako Kenkyusho's P/S Mean For Shareholders?

Hoden Seimitsu Kako Kenkyusho's revenue growth of late has been pretty similar to most other companies. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. If not, then existing shareholders may be a little nervous about the viability of the share price.

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Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Hoden Seimitsu Kako Kenkyusho's is when the company's growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 7.4%. However, due to its less than impressive performance prior to this period, revenue growth is practically non-existent over the last three years overall. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Turning to the outlook, the next year should generate growth of 6.4% as estimated by the two analysts watching the company. With the industry predicted to deliver 4.5% growth , the company is positioned for a comparable revenue result.

With this information, we find it interesting that Hoden Seimitsu Kako Kenkyusho is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Hoden Seimitsu Kako Kenkyusho's P/S Mean For Investors?

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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Hoden Seimitsu Kako Kenkyusho currently trades on a higher than expected P/S. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Hoden Seimitsu Kako Kenkyusho that you need to be mindful of.

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.