Subdued Growth No Barrier To Chieftek Precision Co., Ltd. (TWSE:1597) With Shares Advancing 32%

Chieftek Precision Co., Ltd. (TWSE:1597) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 27% in the last year.

Since its price has surged higher, when almost half of the companies in Taiwan's Machinery industry have price-to-sales ratios (or "P/S") below 2.2x, you may consider Chieftek Precision as a stock not worth researching with its 7.6x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Chieftek Precision

What Does Chieftek Precision's Recent Performance Look Like?

For example, consider that Chieftek Precision's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. 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 Chieftek Precision will help you shine a light on its historical performance.

What Are Revenue Growth Metrics Telling Us About The High P/S?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Chieftek Precision'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 34%. This means it has also seen a slide in revenue over the longer-term as revenue is down 32% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 18% shows it's an unpleasant look.

With this in mind, we find it worrying that Chieftek Precision's P/S exceeds that of its industry peers. 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. There's a very 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.

The Key Takeaway

The strong share price surge has lead to Chieftek Precision's P/S soaring as well. 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 Chieftek Precision revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Chieftek Precision (1 doesn't sit too well with us!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Chieftek Precision, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com