Nemak, S. A. B. de C. V. (BMV:NEMAKA) Looks Inexpensive But Perhaps Not Attractive Enough

Nemak, S. A. B. de C. V.'s (BMV:NEMAKA) 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 Auto Components industry in Mexico have P/S ratios greater than 0.8x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Nemak S. A. B. de C. V

What Does Nemak S. A. B. de C. V's P/S Mean For Shareholders?

Nemak S. A. B. de C. V certainly has been doing a good job lately as it's been growing revenue more than most other companies. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Nemak S. A. B. de C. V.

Do Revenue Forecasts Match The Low P/S Ratio?

Nemak S. A. B. de C. V's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 26%. The strong recent performance means it was also able to grow revenue by 94% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 3.0% each year as estimated by the five analysts watching the company. That's not great when the rest of the industry is expected to grow by 8.3% each year.

In light of this, it's understandable that Nemak S. A. B. de C. V's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It's clear to see that Nemak S. A. B. de C. V maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Nemak S. A. B. de C. V (1 is potentially serious!) that you should be aware of before investing here.

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.