Some Hanshin Machinery Co., Ltd. (KRX:011700) Shareholders Look For Exit As Shares Take 32% Pounding

Hanshin Machinery Co., Ltd. (KRX:011700) shares have had a horrible month, losing 32% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 48% in that time.

Although its price has dipped substantially, you could still be forgiven for thinking Hanshin Machinery is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.5x, considering almost half the companies in Korea's Machinery industry have P/S ratios below 0.9x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Hanshin Machinery

How Has Hanshin Machinery Performed Recently?

As an illustration, revenue has deteriorated at Hanshin Machinery over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hanshin Machinery will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Hanshin Machinery?

The only time you'd be truly comfortable seeing a P/S as high as Hanshin Machinery's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 6.9% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 5.2% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 40% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Hanshin Machinery's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

Despite the recent share price weakness, Hanshin Machinery's P/S remains higher than most other companies in the industry. 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 Hanshin Machinery revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 3 warning signs we've spotted with Hanshin Machinery (including 1 which is significant).

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.