Nippon Coke & Engineering Company, Limited's (TSE:3315) Business Is Trailing The Industry But Its Shares Aren't

There wouldn't be many who think Nippon Coke & Engineering Company, Limited's (TSE:3315) price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S for the Oil and Gas industry in Japan is similar at about 0.2x. 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.

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What Does Nippon Coke & Engineering Company's P/S Mean For Shareholders?

For instance, Nippon Coke & Engineering Company's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

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How Is Nippon Coke & Engineering Company's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Nippon Coke & Engineering Company's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 21%. The last three years don't look nice either as the company has shrunk revenue by 33% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to decline by 7.9% over the next year, or less than the company's recent medium-term annualised revenue decline.

In light of this, it's somewhat peculiar that Nippon Coke & Engineering Company's P/S sits in line with the majority of other companies. With revenue going quickly in reverse, it's not guaranteed that the P/S has found a floor yet. There's potential for the P/S to fall to lower levels if the company doesn't improve its top-line growth, which would be difficult to do with the current industry outlook.

What We Can Learn From Nippon Coke & Engineering Company's P/S?

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.

Our examination of Nippon Coke & Engineering Company revealed its sharp three-year contraction in revenue isn't impacting its P/S as much as we would have predicted, given the industry is set to shrink less severely. When we see below average revenue, we suspect the share price is at risk of declining, sending the moderate P/S lower. We're also cautious about the company's ability to stay its recent medium-term course and resist even greater pain to its business from the broader industry turmoil. Unless the company's relative performance improves, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Nippon Coke & Engineering Company that you should be aware of.

If these risks are making you reconsider your opinion on Nippon Coke & Engineering Company, 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.