IHI Corporation's (TSE:7013) Shareholders Might Be Looking For Exit

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 IHI Corporation (TSE:7013) as a stock to potentially avoid with its 1.5x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for IHI

How Has IHI Performed Recently?

IHI certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. 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 IHI.

What Are Revenue Growth Metrics Telling Us About The High P/S?

IHI's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered an exceptional 18% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 36% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 4.9% per year during the coming three years according to the eleven analysts following the company. That's shaping up to be similar to the 5.0% each year growth forecast for the broader industry.

In light of this, it's curious that IHI's P/S sits above the majority of other companies. 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.

The Final Word

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Analysts are forecasting IHI's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable 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.

Plus, you should also learn about these 2 warning signs we've spotted with IHI.

If you're unsure about the strength of IHI's 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.