Investor Optimism Abounds Hong Tai Electric Industrial Co., Ltd. (TWSE:1612) But Growth Is Lacking

It's not a stretch to say that Hong Tai Electric Industrial Co., Ltd.'s (TWSE:1612) price-to-sales (or "P/S") ratio of 1.6x right now seems quite "middle-of-the-road" for companies in the Electrical industry in Taiwan, where the median P/S ratio is around 1.7x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Hong Tai Electric Industrial

What Does Hong Tai Electric Industrial's P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Hong Tai Electric Industrial, which is generally not a bad outcome. One possibility is that the P/S is moderate because investors think this good revenue growth might only be parallel to the broader industry in the near future. If not, then at least existing shareholders probably aren't too pessimistic about the future direction of the share price.

Although there are no analyst estimates available for Hong Tai Electric Industrial, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Hong Tai Electric Industrial?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Hong Tai Electric Industrial's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 2.9% last year. Pleasingly, revenue has also lifted 45% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 19% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Hong Tai Electric Industrial is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Final Word

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Hong Tai Electric Industrial revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Having said that, be aware Hong Tai Electric Industrial is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Hong Tai Electric Industrial, 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.