Why Investors Shouldn't Be Surprised By Watts Co., Ltd.'s (TSE:2735) Low P/S

Watts Co., Ltd.'s (TSE:2735) price-to-sales (or "P/S") ratio of 0.1x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Multiline Retail industry in Japan have P/S ratios greater than 0.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Watts

What Does Watts' Recent Performance Look Like?

It looks like revenue growth has deserted Watts recently, which is not something to boast about. It might be that many expect the uninspiring revenue performance to worsen, which has repressed the P/S. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Although there are no analyst estimates available for Watts, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Watts?

In order to justify its P/S ratio, Watts would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Still, the latest three year period was better as it's delivered a decent 13% overall rise in revenue. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Comparing that to the industry, which is predicted to deliver 7.4% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in consideration, it's easy to understand why Watts' P/S falls short of the mark set by its industry peers. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What Does Watts' P/S Mean For Investors?

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.

Our examination of Watts confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

You should always think about risks. Case in point, we've spotted 4 warning signs for Watts you should be aware of, and 1 of them doesn't sit too well with us.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.