A Piece Of The Puzzle Missing From Kawasaki Heavy Industries, Ltd.'s (TSE:7012) 25% Share Price Climb

The Kawasaki Heavy Industries, Ltd. (TSE:7012) share price has done very well over the last month, posting an excellent gain of 25%. The last month tops off a massive increase of 136% in the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Kawasaki Heavy Industries' P/S ratio of 0.6x, since the median price-to-sales (or "P/S") ratio for the Machinery industry in Japan is also close to 0.7x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Kawasaki Heavy Industries

What Does Kawasaki Heavy Industries' P/S Mean For Shareholders?

Recent times have been advantageous for Kawasaki Heavy Industries as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

Keen to find out how analysts think Kawasaki Heavy Industries' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Revenue Growth Forecasted For Kawasaki Heavy Industries?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Kawasaki Heavy Industries' to be considered reasonable.

Retrospectively, the last year delivered a decent 13% gain to the company's revenues. The latest three year period has also seen a 30% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 8.9% per year as estimated by the twelve analysts watching the company. With the industry only predicted to deliver 4.8% per annum, the company is positioned for a stronger revenue result.

In light of this, it's curious that Kawasaki Heavy Industries' P/S sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Final Word

Kawasaki Heavy Industries' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Kawasaki Heavy Industries currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. When we see a strong revenue outlook, with growth outpacing the industry, we can only assume potential uncertainty around these figures are what might be placing slight pressure on the P/S ratio. This uncertainty seems to be reflected in the share price which, while stable, could be higher given the revenue forecasts.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Kawasaki Heavy Industries (2 are a bit unpleasant) you should be aware of.

If you're unsure about the strength of Kawasaki Heavy Industries' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.