Little Excitement Around Tongtai Machine & Tool Co., Ltd.'s (TWSE:4526) Revenues As Shares Take 25% Pounding

Tongtai Machine & Tool Co., Ltd. (TWSE:4526) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Longer-term, the stock has been solid despite a difficult 30 days, gaining 18% in the last year.

After such a large drop in price, it would be understandable if you think Tongtai Machine & Tool is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 1.1x, considering almost half the companies in Taiwan's Machinery industry have P/S ratios above 2.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Tongtai Machine & Tool

What Does Tongtai Machine & Tool's Recent Performance Look Like?

For instance, Tongtai Machine & Tool's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. Those who are bullish on Tongtai Machine & Tool will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Tongtai Machine & Tool's earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Tongtai Machine & Tool?

The only time you'd be truly comfortable seeing a P/S as low as Tongtai Machine & Tool's is when the company's growth is on track to lag the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 24%. This means it has also seen a slide in revenue over the longer-term as revenue is down 36% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 17% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that Tongtai Machine & Tool is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

The southerly movements of Tongtai Machine & Tool's shares means its P/S is now sitting at a pretty low level. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It's no surprise that Tongtai Machine & Tool maintains its low P/S off the back of its sliding revenue over the medium-term. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Tongtai Machine & Tool (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.