Taiyo Technolex Co.,Ltd. (TSE:6663) May Have Run Too Fast Too Soon With Recent 25% Price Plummet

To the annoyance of some shareholders, Taiyo Technolex Co.,Ltd. (TSE:6663) shares are down a considerable 25% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 44% in that time.

In spite of the heavy fall in price, there still wouldn't be many who think Taiyo TechnolexLtd's price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S in Japan's Electronic industry is similar at about 0.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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See our latest analysis for Taiyo TechnolexLtd

What Does Taiyo TechnolexLtd's Recent Performance Look Like?

Taiyo TechnolexLtd has been doing a decent job lately as it's been growing revenue at a reasonable pace. Perhaps the expectation moving forward is that the revenue growth will track in line with the wider industry for the near term, which has kept the P/S subdued. 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 not quite in favour.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Taiyo TechnolexLtd's earnings, revenue and cash flow.

How Is Taiyo TechnolexLtd's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Taiyo TechnolexLtd's is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a worthy increase of 3.2%. Still, lamentably revenue has fallen 10% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 8.1% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Taiyo TechnolexLtd is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Taiyo TechnolexLtd's P/S Mean For Investors?

Following Taiyo TechnolexLtd's share price tumble, its P/S is just clinging on to the industry median P/S. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look at Taiyo TechnolexLtd revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

You need to take note of risks, for example - Taiyo TechnolexLtd has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.