There's No Escaping Tongtai Machine & Tool Co., Ltd.'s (TWSE:4526) Muted Revenues Despite A 41% Share Price Rise

Tongtai Machine & Tool Co., Ltd. (TWSE:4526) shareholders have had their patience rewarded with a 41% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 56% in the last year.

Although its price has surged higher, given about half the companies operating in Taiwan's Machinery industry have price-to-sales ratios (or "P/S") above 2.1x, you may still consider Tongtai Machine & Tool as an attractive investment with its 1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Tongtai Machine & Tool

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

As an illustration, revenue has deteriorated at Tongtai Machine & Tool over the last year, which is not ideal at all. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Although there are no analyst estimates available for Tongtai Machine & Tool, take a look at this free data-rich visualisation to see how the company stacks up on 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.

Retrospectively, the last year delivered a frustrating 14% decrease to the company's top line. As a result, revenue from three years ago have also fallen 8.2% overall. 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 19% shows it's an unpleasant look.

With this information, we are not surprised that Tongtai Machine & Tool is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Final Word

The latest share price surge wasn't enough to lift Tongtai Machine & Tool's P/S close to the industry median. 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 Tongtai Machine & Tool confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Tongtai Machine & Tool is showing 3 warning signs in our investment analysis, and 2 of those are potentially serious.

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.

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