Nippon Chemi-Con Corporation's (TSE:6997) Popularity With Investors Is Under Threat From Overpricing

There wouldn't be many who think Nippon Chemi-Con Corporation's (TSE:6997) price-to-sales (or "P/S") ratio of 0.2x is worth a mention when the median P/S for the Electronic industry in Japan is similar at about 0.6x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Nippon Chemi-Con

What Does Nippon Chemi-Con's Recent Performance Look Like?

Nippon Chemi-Con could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Nippon Chemi-Con.

Is There Some Revenue Growth Forecasted For Nippon Chemi-Con?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Nippon Chemi-Con's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 21%. As a result, revenue from three years ago have also fallen 5.9% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 2.3% as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 8.3% growth forecast for the broader industry.

With this in mind, we find it intriguing that Nippon Chemi-Con's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From Nippon Chemi-Con'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 look at the analysts forecasts of Nippon Chemi-Con's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 3 warning signs for Nippon Chemi-Con (1 can't be ignored!) that we have uncovered.

If these risks are making you reconsider your opinion on Nippon Chemi-Con, 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.